IRS argued its claims by explaining that general tax principles which are applicable to property transactions can be applied to transactions using virtual currency. In other words, Bitcoins would be taxed as ordinary income or as assets subject to capital gains taxes, as the case implies.
The IRS stated that virtual currency is not to be treated as legal tender currency to determine if a transaction causes a foreign currency gain or loss under US tax law. Put differently, profits or losses from sale or exchange of virtual currency is strictly related to whether the virtual currency is a capital asset in the hands of the taxpayer.
Moreover, in the case of a taxpayer holding virtual currency as capital, his gains or losses are realized as capital gains or losses respectively. Still, when virtual currency is held as inventory or other property mainly for sale to customers in a trade or business, the respective gains or losses are generally incurred, the IRS said.
Bitcoin started circulating in 2009. Its present market value is around USD 8 billion, with up to 80,000 transactions occurring daily, according to accounting firm PricewaterhouseCoopers LLP.
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