In March of this year the IRS decided that Bitcoin (and all virtual currency) is property. Bloomberg points out that, “Purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop.”
And like stocks, this means you should hold your Bitcoin to get a better tax rate: “Bitcoins held for more than a year and then sold would face the lower tax rates applicable to capital gains — a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.”
In Section 3. Scope of the IRS Notice 2014-21.pdf it states that, “the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” The convertible aspect refers to the virtual currency that has an equivalent value for real currency. The notice the IRS put out is specifically dealing with these kinds of “convertible” virtual currencies and not something like an in-game currency which has no equivalent value.
In Video Game Land we have Free To Play (F2P) games that allow you to buy virtual currencies. But these are not convertible because you can never get real money back. If you buy a thousand gold coins for $39.99, spend it on a new flaming sword and then turn that into a million coins by slaying a dragon, you’re only rich in Video Game Land.
Unless of course games like VoidSpace become common. VoidSpace is an in-progress space-themed simulation game that will use the crypto currency Dogecoin in the game. Meaning the “gold” of the game will actually have a real world value. Meaning that if you do very well playing the game you are going to have an incredibly complicated tax filing. 😉