The Bitcoin and other virtual digital currency that can be digitally traded through the internet and exchanged into US dollars has been around since 2009, however prior to an IRS announcement yesterday, digital currency like the Bitcoin was not regulated by the government and it was up in the air about how income or losses generated from the exchange of this mysterious currency should be taxed.
Yesterday the IRS answered this long standing question about the taxation of virtual digital currency, announcing that virtual digital currency like Bitcoins should be taxed as property instead of currency for federal tax purposes and the same rules that apply to property transactions like the sale of stocks apply to virtual currency.
So what does this mean for you if you’re a tech savvy taxpayer dabbling in trading this form of currency?
Here are top things you need to know about the new law:
- The new law refers only to convertible virtual currency like the Bitcoin.
- If your employer pays your wages as virtual currency then you will be taxed at the fair market value and will be subject to income and payroll tax withholding.
- Independent contractors who receive virtual currency for performing services have to include the fair market value in self-employment income and that income is subject to self-employment tax.
- If you receive virtual currency as payment for goods and services, you have to include the fair market value of the currency in your taxable gross income.
- The value or basis of virtual currency received as payment for goods and services is the fair market value of virtual currency in US dollars as of the date of receipt.
- If you successfully “Mine” virtual currency, then the fair market value of the virtual currency is included in gross income as of the date of receipt.
- If you exchange virtual currency for other property and have a gain or loss then you would recognize the gain or loss on your taxes. The way the gain or loss is recognized depends on if the virtual currency is held as a capital asset like stocks or held as property for sale to customers.
- If you make a payment to an independent contractor using virtual currency, you are subject to the same information reporting requirements as any other payment made in property.
- Per the IRS, if you trade virtual currency and don’t comply with the new law, you may be subject to accuracy related penalties and failure to timely correctly report any of these types of transactions.
As with all tax laws, TurboTax is up to date with the latest tax law changes. If you have more questions you can get answers in the TurboTax AnswerXchange.
How do you feel about Bitcoins? What do you think about the new law regulating them?