Virtual Currency Treated As Property by IRS

The Internal Revenue Service recently released their views on the proper tax treatment of virtual currencies such as bitcoin.  These virtual currencies are often used as a medium of exchange for payment for goods and services.  In this regard, they operate like real currencies backed by the full faith and credit of the government that issues them.  The difference is that virtual currencies are not backed by a sovereign government.  It’s not legal tender of any jurisdiction.

Based on the fact that a government does not issue virtual currency, the IRS ruled that the receipt of virtual currency is the same as the receipt of property.  So if someone is paid for goods or service with bitcoin, it would be the same as if that person was paid with a boat, car or a new set of golf clubs.  And the general tax rules with respect to the receipt of property apply.  Note though, the foreign currency exchange rules do not apply to virtual currency.

When you receive virtual currency as payment, you report as gross income an amount equal to the fair market value of the virtual currency at the time you received it.  And the fair market value must be stated in U.S. dollars on your tax return.

When you exchange virtual currency for other goods and services there could be a gain or loss on the exchange.  The gain or loss will depend on your adjusted basis in the virtual currency at the time of the exchange.  The character of the gain on loss on the exchange of virtual currency depends on whether or not it is a capital asset when owned by you.

In its notice regarding virtual currency, the IRS also listed rules for reporting obligations, “mining” virtual currency, self-employment tax obligations, employer withholding obligations and penalties for failure to properly report virtual currency transactions on your tax return.

If you have received virtual currency as payment for goods or services, or used it to pay for goods and services and need advice as to how to properly reflect these transactions in your tax records, then schedule your free consultation by calling (480) 888-7111 [or submit a web request here].