The IRS has ruled bitcoin should be treated as property, not as currency, for tax purposes. That could be awkward, as the WSJ points out...say a person buys $5,000 of bitcoin, which then doubles in value. If she then uses the bitcoin to pay a $10,000 tuition bill, she could have a $5,000 taxable capital gain on the transaction.
This clarification means that people who use bitcoin in small amounts, such as to buy a meal, could face onerous record-keeping issues.
"Users will have to track their transactions and determine the amount of their taxable gain each time," he told BI in an email. "It's quite a burden. The rules on taxing foreign currency provide an exception for 'personal transactions' for that very reason. It would be great to have that exception (or something similar) apply to bitcoins as well." But the IRS' guidance may not stand forever. The Treasury Department should now begin developing formal regulations tailored to digital currencies.