IRS considers virtual currency as property
Here is a compact review of the IRS notice from 2014 which puts the recordkeeping and valuation of virtual currency into the hands of the taxpayer.
We might call it “virtual currency” but we cannot assume that it is virtually currency. Virtual currency does not have legal tender status in any jurisdiction.
The IRS stated that for U.S. federal tax purposes, transactions using virtual currency (such as Bitcoin) will be held to the general tax principles that apply to property transactions. The sale or exchange, or the use of convertible virtual currency to pay for goods or services in real-world economy transaction, has tax consequences that may result in a tax liability, according to the IRS Notice.
Digested virtual currency:
- Virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.
- For purposes of computing gross income, virtual currency received as payment for goods or services must include documentation of the fair market value of the virtual currency, measured in US dollars, as of the date it was received. The IRS notice actually refers the taxpayer to information relative to computation of basis when property is received for goods or services.
- If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has a gain. If less, a loss. The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- For a taxpayer who successfully mines virtual currency, the fair market value of the virtual currency resulting from mining is determined as of the date of receipt and is includible in gross income.
- If a taxpayer mines virtual currency as a trade or business (but not as an employee) the individual is subject to self-employment tax on the net earnings.
- The fair market value of virtual currency paid by an employer as remuneration for services constitutes wages and is subject to FICA and FUTA taxes, reportable of Form W-2.
- Payments made using virtual currency are subject to information reporting to the same extent as any other payment made in property. Examples of fixed and determinable income include rent, salaries, wages, premiums, annuities and compensation.
- Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. These payments are subject to backup withholding to the same extent as other payments made in property.
- If certain conditions are met, there are 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
What’s the bottom line?
It may appear to some that virtual currency held in a ‘wallet’ is not traceable, therefore neither reportable nor taxable. This, I would say, is much like saying that driving over the speed limit is perfectly legal as long as the radar doesn’t get you.
If you are involved in any transactions using virtual currency, or plan to be, we need to talk. Call me.
Here what the IRS says