The IRS has officially stated that bitcoin is a property – similar to any other valuable commodity – rather than a currency. What does this mean? Not much. In short, if you pay someone in bitcoin – in the same way you could pay them in gold – the wages are taxed accordingly. It is also not considered legal tender but a capital asset.

The key line is here: “A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.” Furthermore:

Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.

The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

We will have more on this ruling as we approach tax lawyers and accountants who may have to soon deal with a new cohort of the “bitcoin rich.” The entire release follows below.