On March 25, 2014, the IRS issued Notice 2014-21 addressing the United States Federal income tax consequences of transactions involving Bitcoin and other virtual currencies. The IRS determined that Bitcoin is treated as property for income tax purposes. This means that it has a tax basis and can lead to the realization of taxable gain or loss when used in a transaction.

If you receive Bitcoin in payment for services, your taxable income is an amount equal to the then fair market value of the Bitcoin on the date you receive it, stated in dollars. This in turn becomes your income tax basis in that Bitcoin. You can also recognize tax gain or loss when you spend the Bitcoin. Suppose you receive a payment in Bitcoin for performing services that were worth $200 when you received the Bitcoin. You would have to report $200 as income on your income tax return for that year. Later, when the value of Bitcoin has increased, you spend that Bitcoin to purchase a new golf club. The price of the new club would be $300 if paid in dollars. You would recognize a gain of $100 on the transaction because your Bitcoin had a tax basis of $200 and you used that to obtain goods worth $300. The IRS did acknowledge that the Bitcoin can be a capital asset in your hands giving rise to a capital gain, provided you are not a dealer in Bitcoin.