|GAO, Virtual Economies and Currencies (May 2013)|
There are still some significant issues for the IRS to address. I note several in the article. A key one is how to track the use of the virtual currency so you can calculate the gain or loss and whether short-term or long-term, every time it is used. The IRS regulations on basis (section 1012) suggest use of FIFO, but that rule only addresses securities. Thus, the default is specific identification. Does this mean you'd have to truly identify the bitcoin you used (if feasible - and that may depend on how you hold the bitcoin) or can you just identify on your own which bitcoin you think you used (and that would really need to be done at the time used, rather than when later filing your return).
Please see the article for other issues and activities. I've also got a webpage with links to tax and other information about virtual currency (including some primers on how these crypto-currencies work).
There are also some state tax issues (I'll have more on that later). In June 2014, the California Board of Equalization issued a notice to help retailers who use a virtual currency. There are state income tax questions about sourcing.
What do you think about the tax issues?