U.S. tax law has special provisions for transactions in foreign currencies. Nine years ago, when crypto was in its infancy, the IRS stated that foreign currency rules would not apply to cryptocurrencies. Instead, crypto would simply be treated as property.
In making that ruling, the IRS observed that virtual currency did not have the status of legal tender in any jurisdiction. Since then, however, two countries, El Salvador and Central African Republic, have adopted bitcoin as legal tender.
Some taxpayers may have wished to exploit this development by applying the foreign currency rules to bitcoin transactions. The IRS has now published Notice 2023-34, clarifying that although bitcoin has been adopted as legal tender in some countries, virtual currencies will continue to be treated as property, not currency, for U.S. federal tax purposes. The special rules for foreign currency transactions will not apply.