On March 25, the Internal Revenue Service (IRS) issued Notice 2014-21 (notice) containing guidance and frequently asked questions relating to virtual currencies such as bitcoins. Among other clarifications, the notice states that the IRS will treat bitcoins as property, rather than a form of currency, for federal income tax purposes. Prior to the notice, no federal agency had released formal guidance relating to the asset classification of bitcoins or other virtual currencies. US Senator Tom Carper, who chaired virtual currency hearings last November and has previously called for the US to “lead the way” on bitcoin regulation, praised the notice as providing a framework for tax compliance among industry participants.

The notice applies to bitcoin and other virtual currencies (which, in general, we collectively refer to as digital assets). For a detailed analysis of bitcoins and their uses and applications, please see our advisory dated November 26, 2013.