The IRS today tried to clear up some of the ongoing row about how bitcoin and other virtual currencies would be treated come tax time.
"In some environments, virtual currency operates like "real" currency -- such as the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction, the IRS stated.
The IRS said general tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, the IRS says 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 tax agency also issued an FAQ (For a full version go here), that included these responses:
How is virtual currency treated for federal tax purposes?For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.
What is the basis of virtual currency received as payment for goods or services in Q&A-3?The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.
How is the fair market value of virtual currency determined?For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?Yes. 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 taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
Does a taxpayer who "mines" virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?Yes, when a taxpayer successfully "mines" virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
Is an individual who "mines" virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?If a taxpayer's "mining" of virtual currency constitutes a trade or business, and the "mining" activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income ta x withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
Most of the news around Bitcoin has been negative of late. Just last week the The IDG News Service wrote that the software driving Bitcoin's network was upgraded, with security fixes addressing a problem that defunct bitcoin exchange Mt. Gox blamed for losing nearly half a billion dollars worth of bitcoins. Upgrading Bitcoin's software is a delicate operation, and many of the changes have been under discussion for months. The market capitalization of all bitcoins in circulation is roughly $8 billion, according to figures from Blockchain.info, and a mistake could be costly.
But the virtual currency has weathered innumerable negative events over the past five years and is still seeing growing adoption by businesses and retailers as an alternative payment platform. The value of a bitcoin wobbled only slightly after Mt. Gox, at one time the largest bitcoin exchange, filed for bankruptcy protection in Tokyo District Court on Feb. 28 and in U.S. Bankruptcy Court for the Northern District of Texas on March 9, The IDG News Service story stated.
Read more about software in Network World's Software section.