Bitcoin, the IRS, and NSA

Author: Bob Eisenbeis, Post Date: March 27, 2014

Question: When is a virtual currency not a currency?

Answer: When the IRS says so

The IRS has determined that Bitcoins will be treated as property for tax and recordkeeping purposes, rather than as a currency. The rationale for treating virtual currencies as property despite their functioning in many cases as a medium of exchange is the fact that they are not “legal tender.” As has been widely reported, this means that Bitcoin transactions will be subject to short-term gains taxation and lower long-term capital gains taxes, and both holders and miners – and presumably exchanges as well – will be subject to extensive recordkeeping and other requirements. What follows is a brief summary provided by the IRS of the kinds of determinations it has made (even more detail can be found in the Q&A in IRS Notice 2014-21):

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.

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