Virtual currencies such as Bitcoin or other "cryptocurrencies" are taxed differently from cash or coin currency.
The IRS generally recognizes virtual currency as property, not legal tender. As such, virtual currency received as payment by an individual or business must be included as miscellaneous income as an exchange of property or service. The value of the payment is determined by the Fair Market Value (FMV) on the date of receipt. The virtual currency must be translated to the legal tender equivalent and then included in income. For more information, see IRS Publication 525, Taxable and Nontaxable Income.
If you received virtual currency as wages, those payments will be recorded on Form W-2 by your employer. If you are paid in virtual currency as an independent contractor, you will receive Form 1099.
A sale or exchange of virtual currency held as a capital asset will result in a gain or loss reported as a Sale or Disposition of Assets. Like stocks, the taxpayer must determine the basis and calculate the gain or loss. For more information, see Publication 544, Sales and Other Dispositions of Assets and Publication 551, Basis of Assets.
You must report sales or exchanges of virtual currency on Form 8949, Sales and other Dispositions of Capital Assets.
With paper currency, the government controls printing and regulation. Virtual currency must be discovered, or mined, by its community of users. Mining virtual currency, though complicated, can be profitable. Like other gig economy income, virtual currency mining earnings may be subject to self-employment tax.
Note. Any link in the information above is updated each year automatically and will take you to the most recent IRS version of the document at the time it is accessed.