Posted on April 03, 2014 by Rick Bazzani
On March 24, the IRS effectively took bitcoin out of the shadows and
announced that it will treat the computer-generated currency as property
for U.S. tax purposes. While many currently consider and use bitcoin as
a currency, whether to purchase products and services or exchange them
for legitimate forms of money, the IRS points out that it will not
consider such convertible virtual currency to have any legal tender
status in any jurisdiction. As a result, bitcoin users will need to
consider and understand the tax implications associated with their use
of the digital currency or risk penalties for failure to comply with the
applicable tax and reporting requirements.
Investing in Bitcoin
As a property, bitcoin is subject to capital gains tax in the same
manner that the IRS taxes gains on property transactions involving
stocks and other investments. When users buy and sell bitcoin on an
exchange and realize a profit, they will have to pay taxes on the
capital gain. The holding period of the virtual currency will dictate
whether this is short- or long-term gain. Likewise, when users sell
bitcoin for less than the acquisition cost (determined by the exchange
rate in U.S. dollars on the date of purchase), they may deduct the
resulting capital loss.
Mining Bitcoin as a Trade or Business
The IRS considers “mining” bitcoins (by solving complex algorithms to
unlock new coins) as a trade or business for which users must include
in their taxable gross income the fair market value of the digital
currency on the date of receipt. Moreover, individuals in the business
of “mining” must recognize that income earned from this trade is subject
to self-employment tax.
Buying and Selling Goods or Services with Bitcoin
Businesses, such as retailers Overstock.com and TigerDirect.com, that
accept bitcoin as payment for the sale of goods or services must
recognize as income the fair market value of the digital currency they
receive, at the exchange rate to the U.S. dollar at the time of receipt.
Shoppers using bitcoin to purchase goods or services must calculate
the gain or loss on the bitcoin based on the fair market value of the
goods and services purchased against the adjusted basis of the bitcoin
used in the transaction.
Tax-Reporting Considerations for Businesses Using Bitcoin
Self-employed individuals and/or independent contractors who receive
bitcoin as income must include this income in the calculation of
self-employment tax. Moreover, individuals who pay independent
contractors using bitcoin must take into consideration the use of
digital currency when determining whether they must issue and report to
the IRS a 1099-MISC. More specifically, these individuals must add the
value of the bitcoin payment to the cash or other payments they make in
return for services to determine if they meet the threshold required to
file the 1099-MISC.
Similarly, businesses and individuals that use virtual currency for
all or partial payment of salaries and wages, interest, rents and other
similar items must report such payments on Form W-2, Form 1099-INT, Form
1099-MISC, respectively.
About the Author: Rick D. Bazzani, CPA, is a senior manager in
Berkowitz Pollack Brant’s Tax Services practice. For more information,
call 305-379-7000 or email info@bpbcpa.com.
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