Bitcoin is a new, virtual currency created in 2009. Transactions are made without banks, without fees, and without giving your real name. Exchange Bitcoins via mobile apps or computers, similar to sending cash digitally (like PayPal). Some big companies, such as Dell, Expedia, and Zynga even accept Bitcoin as payment.
Virtual currency sounds great except that as far as the IRS is concerned, Bitcoin is not considered cash. It is considered to be property. Similar to buying and selling stock, you need to record the cost you paid for the Bitcoin and the value when you sold it.
Here’s an example. You buy a Bitcoin for $2- this is your cost. Later you use that Bitcoin to pay for $10 worth of Candy Crush items from Zynga. The $10 would be your sales price. According to the IRS, you have a taxable gain of $8 ($10 sale less the $2 cost), which you need to report on your tax return! Pay $10 to Zynga in cash, and there would not be anything to report.
Tax issues surrounding Bitcoin and virtual currency are new and developing. If you work with Bitcoin and have tax questions, please contact me.