Note the FBAR language:

United States persons are required to file an FBAR if .. . The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Em...

However, if I have my bitcoins here in the US, does that count as a foreign financial account? Or is it more akin to having a local store of gold. I doubt the IRS has any real guidance for these questions yet...

Since ownership of bitcoins is having the private key that controls the address on a globally distributed general ledger, what the hell does location mean in this case?

location = wallet.

What if it's a brainwallet?

https://en.bitcoin.it/wiki/Brainwallet

The brain presumably still has a location.

The exchanges will all eventually have reporting requirements for US citizens making transfers above a certain threshold in a certain period of time.

Once the IRS actually gets to work and addresses this they'll probably end up altering terminology so that a bit coin "account" is comparable to all bit coins within an individuals direct ownership and control.

In the end investment proceeds from bitcoin will be taxed and traced. I wouldn't try to outsmart or game the US government in terms of account balances, I could see a "smart" early adopter going to jail because of their efforts to avoid taxes.

If you make money buying and selling bitcoins, that is a taxable capital gain.

And if the money's never on an exchange, but just in the network? And how do they prove I own any bitcoin?

I wondered about this too, if it gets to the point where you can buy significant goods and services with bitcoin then it's basically a tax evaders dream.

Only to the point where the IRS audits you for spending significantly more money than you earn. Drug dealers and organized criminals get caught for this very problem concerning undeclared cash.

That's true, if you have a ferrari and declare minimum wage income you'll have problems though there are many less conspicuous ways to spend/save/invest the money.

You would certainly get a significant rise in tax evasion. I'm not actually convinced that's a bad thing overall (though I'm not inherently anti tax). If it brings tax schemes previously only available to the wealthy into the hands of commoners.

Good point. But even if you reveal ownership of any bitcoins "as soon as you have to" (oh yeah I sold some consulting overseas for 100 BTC ...), and pay the taxes on them, it still functions as a great way to protect your savings against inflation-happy governments, in a way that commodities and "inflation-protected government bonds" can't.

Ask any Argentinian if they'd like to have kept a stash before the Corralito.

No, it really doesn't.