Oh my. What does this mean for bitcoin payment processors like BitPay?
Say I use BTC to buy $1000 in gold from someone who uses BitPay. This exceeds the $600 reporting threshold. As BitPay is doing the BTC->USD conversion, the gold dealer gets paid in cash and has no reporting responsibility. However, in this scenario, I believe BitPay would have a reporting responsibility. Ugh.
Edit: It turns out the IRS Q&A addresses this in Q-15 (below). Form 1099-K is filed by the payment processor for funds paid to the merchant. It's not immediately clear that there's any reporting by the payment processor that would pertain to the bitcoin spender :
===
Q-15: Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?
A-15: Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.
See The Third Party Information Reporting Center,
http://www.irs.gov/Tax-Professionals/Third-Party-Reporting-Information-Center, for more information on reporting transactions on Form 1099-K.
===