Bitcoin = property, not currency.

A number of businesses now accept Bitcoin "digital currency" as payment for goods and services. There is now IRS guidance on how to treat Bitcoin transactions. Basically, Bitcoin and other digital or virtual currencies are to be treated as you would treat any other property. Thus, transactions involving digital currency potentially have capital gains and losses. A taxpayer must determine the basis of the digital currency upon receiving it and compute any capital gain or loss when the digital currency is exchanged for goods or services.

The guidance (at www.irs.gov, search bitcoin, click on first item, scroll to Notice 2014-21 and click on it) gives details on how to record different kinds of digital currency transactions. Here are some excerpts [Notice 2014-21; 2014-16 IRB 1]:

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A-6: Yes. If the fair market value (FMV) of property received in exchange for virtual currency exceeds the adjusted basis of the virtual currency, the taxpayer has taxable gain -- if the FMV of the property received is less than the adjusted basis of the virtual currency, the taxpayer has a loss. See Pub. 544, Sales and Other Disposition of Assets, for details on the tax treatment of sales and exchanges, such as whether a loss is deductible.

Q-7: What type of gain or loss does a taxpayer realize upon the sale or exchange of virtual currency?

A-7: The character of the gain or loss generally will depend on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally will realize a capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Pub. 544 for details on capital assets and the character of gain or loss.

Warning; If you pay either employees or ICs using a virtual or digital currency, you must apply all taxes and withholding and report the value on the individual's W-2 or 1099.