December 2018 JD Supra
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Many are now looking for IRS Guidance on Virtual Currency – JD Supra.

Due to its unprecedented level of value appreciation, Bitcoin investors, consumers and businesses are looking for IRS Guidance.  IRS recognizes that “virtual currency” may be used to pay for goods or services, or be held for investment; and that its sale exchange or use has tax consequences that may result in a tax liability.  

IRS issued Notice 2014-21 to describe how existing general tax principles apply to transactions using virtual currency.  The notice was issued to provide guidance and it was released in the form of frequently asked questions.  Highlights are:

  • For federal tax purposes, virtual currency is treated as property.
  • Virtual currency is not treated as a currency that could generate foreign currency gain or loss for U.S. federal tax purposes. 
  • 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.
  • The basis of virtual currency that a taxpayer receives as payment for goods or is the fair market value of the virtual currency in U.S. dollars as of the date of receipt
  • For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars.
  • 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 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.
  • A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.
  • 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.
  • 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 resulting from those activities constitute self-employment income and are subject to the self-employment tax.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
  • A person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income.
  • The payment recipient may have income even if the recipient does not receive a Form 1099-MISC.
  • Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. 
  • Payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required.
  • A third party settlement organization is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.

In summary, IRS Notice 2014-21 provides the following clarity regarding virtual currency:

  • Bitcoins are not a currency.  They are considered personal property and taxed as a capital asset.
  • If a Bitcoin is converted into currency and there is a gain, it is subject to capital gain.
  • If goods or services are purchased with Bitcoins, the Taxpayer must also account for the gains.
  • A Taxpayer that receives Bitcoin as payment for goods or services must include the fair market value of the digital currency received measured in USD in the gross income on the date of the receipt. 
  • Digital currency that is held and then sold at a gain is subject to either long- or short-term capital gains tax.
  • A Taxpayer, who holds digital currency for sale in a trade or business, is subject to ordinary gain or loss upon sale.
  • Digital currency is recognized income immediately at the fair market value.  This income could be subject to self-employment tax.

Don’t be a victim of your own making.  If you are Taxpayer investing, making payments or receiving payment in virtual currency, consult your tax specialist.  Taxpayers may be subject to penalties for failure to comply with tax laws. Underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. Failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. There are reporting requirements even if the Taxpayer does not receive a Form-1099.