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IRS stands pat on Bitcoin

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in Small Business Tax

Although Bitcoin isn’t “mainstream” yet—far from it—the tide appears to be slowly turning. Even if you’re not using this virtual currency or others like it for yourself or your business, it may have touched your life in one way or another.

Alert: Certain tax issues still have to be resolved. The IRS issued an important Notice back in 2014, but has been mostly silent on the subject since then. (IRS Notice 2014-21, 3/25/14) More recently, the IRS served a summons against Coinbase, seeking details about customers who traded digital currency from 2013 through 2015.

In the 2014 Notice, the IRS said that paying for goods or services in Bitcoin or some other virtual currency could result in a capital gains or loss.

Here’s the whole story: Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value. However, it does not have legal tender status in any jurisdiction.

Under the new ruling, virtual currency is treated as property for federal tax purposes. The same general tax principles that apply to property transactions also apply to transactions using virtual currency. Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

The IRS has provided additional details in a set of 16 questions and answers that can be found at www.irs.gov/irb/2014-16_IRB/ar12.html.

Some tax experts, as well as taxpayers, are still puzzled by the concepts. It would seem that someone who orders a $10 pizza with Bitcoin he or she acquired for $8 would have to report a $2 gain, while the restaurant must report $10 of taxable income.

Tip: Stay tuned for updates.

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