VirtuaL ReguLation.

• Position: Tax regulations

despite the considerable amount of negative publicity in recent months -- the bankruptcy filing of Mt. Gox. the seizure the FBI of thousands of bitcoins from the Silk Road operation and major disruptions caused by network software defects Bitcoin appears to be here to stay, and so are the thorny lax issues relating to the use and holding of the most notable virtual currency in existence..

the number of bitcoins in circulation and the related number of transactions continue to increase on a weekly basis but, since Bitcoin lacks both governmental and institutional backing, it's latent with substantial financial risks to users and investors. It also poses serious tax concerns because the tax implications for individuals and businesses that use the virtual currency are still in the making by the various federal and stale taxing authorities that are quickly seeking to create an appropriate regulatory framework for virtual currencies.

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, has taken the lead in this area as part of its mission to gather and analyze information about financial transactions to prevent terror activities, money laundering and other types of financial crime. It seems reasonable that the IRS will use the same definitions for users, exchangers and administrators as provided in the FinCEN regulations regarding virtual currencies.

This article will focus on the income tax consequences for users namely persons who obtain virtual currency to purchase goods or services, and the possible resulting filing requirement for financial accounts in a foreign country.

Official Guidance Issued

Though the IRS provided some official guidance March 25 with the issuance of Notice 2014-21, many of the related tax issues and attendant recording requirements remain unclear. The purported goal of this notice was to describe how existing general lax principles apply to transactions using a virtual currency.

The notice, which is in the form of an FAQ., states that bitcoins and other virtual currencies will be treated as property (rather than a foreign currency). As a result of this classification, a person who uses bitcoins to purchase property must treat such an acquisition as a barter transaction and recognize gain on the difference between the original price of the bitcoins and their lair market value (measured in terms of U.S. dollars) on the date of the acquisition.

Furthermore, those who receive...