taxLately, I have noticed a small but consistent increase of employers using Bitcoin and other cryptocurrencies to pay their employees instead of using physical currency. I started to research more about cryptocurrencies and if, these virtual currencies, are also subject to taxation just as much as physical currencies are by the IRS. Let me start by giving you a brief introduction of what cryptocurrencies are. Cryptocurrencies are virtual currencies that use peer to peer technology to operate with no central authority or banks (No Uncle Sam in the middle). Their designs are public, nobody owns or controls them and everyone can take part. They are also convertible, meaning they have an equivalent value in real or physical currency. According to the Internal Revenue Service (IRS) virtual currency may be used to pay for goods or services, or held for investment. If you are as old as I am, you are familiar with Napster, the first peer-to-peer (P2P) file sharing Internet service that abruptly disrupted the music industry. Well, the word out there is that cryptocurrencies are the Napster of physical currency and it is already disrupting the way retailers do business online. Bitcoin has achieved the acceptance of the public worldwide and has become one of the most successful e-currency (1 Bitcoin is equivalent to $4,308.95 US Dollar). Clearly no one expected such a hit, not even the Internal Revenue Service (IRS); thus, the IRS has recently made tax clarifications regarding the treatment of virtual currencies and their transactions.
How is cryptocurrency treated for federal tax reporting?
Virtual currency is viewed as personal property for federal tax reporting. Therefore, the same tax principals that are relevant to property transactions are also applicable to transactions using virtual currency. Having said that, if you received virtual currency as payment for goods or services, you must convert the virtual currency value to U.S. dollars, as of the date that the virtual currency was received and report it as income. If you have traded cryptocurrencies you must also report any gains or losses on your tax returns.
As an independent contractor, should I report any virtual currency payments received for services rendered?
Yes. The fair market value of virtual currency earned for services rendered as an independent contractor, measured in U.S. dollars as of the date of receipt, represents self-employment income and is subject to the self-employment tax.
Does virtual currency waged by an employer as compensation for work rendered represent incomes for employment tax purposes?
Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.
Is a payment made using virtual currency subject to information reporting?
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who during a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.
Is a person who during a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?
Generally, a person who during 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.