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Ive heard bitcoins are about to be taxed by the IRS. The decision has been taken to regulate the virtual currency as there are concerns of it being used for illegal purposes. Is this True ?

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In the US income is taxed so I would expect income from Bitcoin to be taxed in some manner. Usually the tax occurs when there is an increase in USD but not in virtual currencies such as the Second Life Linden. Bitcoin is a little different and it's place is still unknown, it is somewhat virtual and moving into the real world, real things can be bought and sold making it more a "real" currency.

To think that one can escape taxation by using Bitcoin instead of USD is not realistic. It is not particularly different that using the Euro to escape US taxation.

There is also a moral issue: Using Bitcoin (or another currency) to escape taxation yet still using services and infrastructure paid for with taxes by others. Think roads, schools, parks, etc.

Concerning illegal purposes" That is a concern of the government and seems to be the reason US currently denominations are limited to $100. The Euro's largest note is €500. The concern is not helped by the CryptoLocker perpetrators using BTC for the ransom.

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    As a side-note, I once read the 500 euros bill is incredibly difficult to find on the market, which some authorities in the Eurozone believe is due to criminal gangs hoarding it to be able to export more cash using less volume and weight :( – Joe Pineda Jan 7 '14 at 16:44
  • There are other legal usages of currency in rather large amounts. Many years ago I lived in England and there were controls about how much money could be taken out of England, less than $1000. My money came from the US and in order to take any of it out later I had to have an "external" account. Only money from outside England could be deposited. I had a car and I wanted to sell it and buy another. The only way the transaction could be done was with cash. I received the entire amount in 1 Pound notes, rather unhandy! – zaph Jan 7 '14 at 16:59
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Something to consider is that taxation does not make Bitcoin legal.

For example, my country (NZ) will charge criminals tax on the proceeds of crimes. You deal in drugs and the taxman wants their cut. Those drugs are not anymore legal just because of the tax.

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