There is a lot of confusion over bitcoin and the tax treatment of gains and losses when the owner sells their asset. The IRS does not make it any easier because they don’t view bitcoin (and other crypto-currency) as currency at all, but rather property.
This brings up some interesting problems. If for example you purchased a car with a stack of USD (or just wrote a check), and the value of the dollars went up from the time you first received them to the time you used them, you would not pay taxes on the gains on the money. However, if you spent bitcoin on the car and the value had gone up, you would be subject to taxes on the appreciation.
The same would be true if you exchanged your bitcoin for USD (ie you made money on its appreciation – trading).
So in a nutshell, the IRS views gains and losses on bitcoin the same as gains and losses on property. This may (and probably will) change in the future of course but for today, don’t go buy a house with your digital wallet full of bitcoin unless you want to pay taxes on them.
Clear as mud…