The IRS announced yesterday that it would treat virtual currency, such as Bitcoin, as property, and it would therefore be subject to capital gains taxes.

By issuing guidance that it intends to treat Bitcoin, and other virtual currency, as property and not as foreign currency, the IRS provides some clarity to investors in this asset.

There are very few companies that currently accept Bitcoin for goods/services—as a practical matter, the bulk of the activity seems to be with individuals and funds buying Bitcoin for investment purposes. However, US taxpayers who do receive virtual currency as payment for goods or services must report its fair market value, measured in US dollars, in gross income as of the date that the virtual currency was received. Furthermore, US taxpayers who use virtual currency to pay for property or services must recognize gain or loss, if the fair market value of the property or services received exceeds or is less than the taxpayer’s adjusted tax basis in the virtual currency.

The guidance from the IRS was not unexpected, and is consistent with the fashion in which other countries have been treating virtual currency for tax purposes. If virtual currency were treated as foreign currency (like Euros or Pounds) and not as property, then gains would be treated as ordinary income and subject to current US federal income tax at rates of as high as 39.6%, but losses would be fully deductible against a taxpayer’s ordinary, income such as wages. Most U.S. taxpayers already were characterizing virtual currency as property, because of the more favorable long-term capital gains rate.

The price of Bitcoin has fluctuated wildly over the past few years, from just a few cents to more than $1,000 to its current price of nearly $600. Because the currency has no central bank, nor is it regulated, avid investors have been able to buy, sell and trade Bitcoin undisturbed and with little fear of oversight.

At the same time, however, because of the unregulated nature of virtual currencies, taxpayers would be well advised to keep track of their adjusted tax basis so as to be able to accurately calculate any gain or loss as noted above.