So far, the Internal Revenue Service hasn’t ruled on or addressed such issues directly. An agency spokesman released the following statement: “The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences” of transactions involving them. The agency is also “aware of the potential tax compliance risks posed by virtual currencies,” he added.

Meanwhile, bitcoin investors and users should be aware of some thorny basic issues. If bitcoin is a capital asset like a stock, says David Shapiro, a principal at PricewaterhouseCoopers in Washington, then long-term capital gains and losses—those on assets held for more than a year—would qualify for a top federal rate of about 24%. But losses above $3,000 could only be deducted against other capital gains.

If, on the other hand, bitcoin counts as a currency (like euros or yen), then gains will be taxed at federal rates on ordinary income up to 43.4%, Mr. Shapiro says, and losses will be fully deductible against ordinary income like wages.

In its preliminary filing, the Winklevoss Bitcoin Trust—a public fund registered by brothers Cameron and Tyler Winklevoss, of Facebook fame—said it intends to treat bitcoin as a capital asset instead of a currency, unless the IRS rules otherwise.

Clearly, someone could have a taxable gain or loss in bitcoin when it is sold or given away. But there could also be a taxable gain or loss when bitcoin is used simply to purchase goods or services, says Mindi Lowy, a tax director at PricewaterhouseCoopers in New York. “The fact that using bitcoin to buy something could trigger taxes will come as a surprise to typical consumers,” she says. Most people, after all, don’t think of spending money as an act that could generate taxable gains or losses.

Taxpayers may also have difficulty tracking a bitcoin’s “cost basis,” which is the price used as the starting point for measuring taxable gain or loss, says Ms. Lowy. Unlike with assets such as stock or mutual funds, there’s no institution keeping bitcoin records, and taxpayers may not even know they need to do so themselves.

Also up in the air: whether offshore-account reporting rules apply to bitcoin. Taxpayers with $10,000 or more in non-U.S.-based financial accounts often have to report the accounts to the U.S. even if they don’t generate income, or else they risk severe penalties.

via How Will the IRS Tax Bitcoin? – WSJ.com.