IRS Classifies Bitcoin as Property, Not Currency
The U.S. Internal Revenue Service (IRS) issues landmark guidance (Notice 2014-21), officially clarifying that for federal tax purposes, virtual currency will be treated as property.
In a long-awaited and highly consequential decision, the U.S. IRS released its official guidance on the tax treatment of Bitcoin. The agency declared that Bitcoin and other virtual currencies were to be treated as property, not as currency. This seemingly simple classification had massive implications. It meant that every time a person used Bitcoin to pay for a good or service, they were technically disposing of a capital asset, triggering a taxable event (either a capital gain or loss).
It also meant that wages paid in Bitcoin were subject to federal income tax withholding and payroll taxes, and mining income was to be treated as self-employment income. While the guidance provided much-needed clarity for taxpayers and accountants, it was widely criticized by the community for imposing an incredibly onerous tracking and reporting burden.
The ruling effectively discouraged the use of Bitcoin for everyday microtransactions, as each coffee purchase could theoretically become a taxable event. This 'property' classification has remained the foundation of U.S.crypto tax policy ever since and has profoundly shaped how Bitcoin is used and accounted for in the United States.