"It's strange to start out the comment with "the rules seem pretty clear," because I was thinking just the opposite. " - Yes, agreed, it is still murky.
Why file anything at all? Because it starts the clock on the statute of limitations, limiting the ability of tax authorities, in the indefinite future, from targeting you with future forensic technologies, for many years worth of compound interest and penalties, or taking even stronger measures against you. And because it is the right thing to do. IRC 6501(c)( 1) False return. In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. See also 6501(c)( 2) Willful attempt to evade tax ; and 6501(c)( 8 ) Failure to notify Secretary of certain foreign transfers.
"And then there's the question to file anything on a schedule D in the first place.
One approach may be to just file it under "other income" and pay income rates. "
Given the lack of standards for presentation of bitcoin income, I would be much more concerned that numbers are reasonably accurate than to presentation.
The investment approach has the advantages of lower long term capital gain rates and perhaps deferred realization of gains in some exchanges, but losses are capital losses which are harder to utilize. In contrast the currency approach more readily realizes gains at ordinary income rates, but any losses are ordinary and easier to realize and carryforward as NOL.
If the dollar difference between the two approaches is large, the taxpayer (or their advisor) may want to pay to obtain a private letter ruling from the IRS on this issue. I have searched but am not aware of any such rulings to date. I would not recommend changing between methods without consulting a CPA or tax attorney, and I also recommend professional advice when choosing between LIFO, specific identification, or other methods of timing trading.
Supporting the currency approach: In SEC vs. Trendon T. Shavers and BTCST Judge Mazzant writes It is clear that Bitcoin can be used as money, It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. Also see IRC 988(c )(1)(C )(ii) Nonfunctional currency. For purposes of this section, the term "nonfunctional currency" includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.
Supporting the investment approach: In California Bankers Assn. v. Shulttz Currency is defined in the Secretarys regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued. Some other jurisdictions may be taking this investment approach.
So far I have been writing about BTC for individuals, not for businesses. If you have a Bitcoin based mining or trading business then your tax basis may not be cash and your functional currency may not be the dollar, and your situation becomes MUCH more complicated.
There are several other compliance reporting issues US taxpayers with bitcoins should be aware of, particularly if you transact bitcoins outside a brokered exchange: FATCA, FBAR, Forms 8300 and 1042-S.
I am a USA CPA licensed in CA and IL, and I can be found on LinkedIn or by Google.
Here is my circular 230 disclaimer. This post is intended to provide generalized tax and valuation information that is only appropriate in certain situations. It is believed accurate at this time, but these rules, alas, are constantly changing. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding tax penalties that may be imposed on any taxpayer. These contents should not be acted upon without specific professional guidance. Our liability, under any circumstances, is limited to the amount paid for our services. Please contact us if you have questions.