IRS treats virtual currency as property

How to Pay Taxes on Bitcoin Establish a record-keeping system for all your transactions, and keep track of when you acquire and when you dispose of Bitcoin. Identify your cost basis method and your exchange rate. Then record the dispositions of Bitcoin on Schedule D and Form 8949. BitPay, for instance, would report the USD equivalent of your transactions to the IRS and send you a 1099-K with the same information. You would only receive a 1099-K form detailing your transaction history if you’ve received more than $20,000 and made more than 200 transactions throughout the year.

As virtual currencies such as Bitcoin rise in prominence and use, the IRS has for the first time described how virtual currency will be treated for tax purposes. The agency concluded in new guidance (Notice 2014–21) that Bitcoin and other virtual currencies like it are not to be treated as currency, but as property.

Definition of virtual currency

Actual (or “real”) currency is commonly defined as a system of money in general use in a particular country. The U.S. dollar is an example of actual currency. A single definition of virtual currency, on the other hand, has not yet achieved widespread acceptance. Virtual currency (sometimes referred to as “cryptocurrency”) is a medium of exchange that operates like actual currency under some circumstances. Currently, virtual currency does not have legal tender status in any jurisdiction.

How virtual currency works

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Currently, the most prominent example of a convertible virtual currency is Bitcoin, which can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real currencies.

A Bitcoin is created, or “mined,” electronically, according to a purely mathematical process. A complex computer algorithm is applied. As more and more Bitcoins are mined, the difficulty of doing so will increase, as it becomes computationally more difficult to create them. This process was designed to mimic the production rate of a commodity such as gold.

Companies like BitPay or Coinbase act as intermediaries in Bitcoin transactions. According to Adam White, the Director of Business Development and Sales at Coinbase, over a million customers use Coinbase as their “Bitcoin wallet,” allowing Coinbase to accept Bitcoin payments on their behalf using its payment tools. This includes over 28,000 merchants.

Fees associated with virtual currency transactions are relatively small in contrast with higher fees charged to businesses accepting credit cards. Credit card companies generally charge businesses a fee per swipe of the card, plus two to four percent of the total transaction. On the other hand, businesses that use a merchant processor pay fees of one percent, or less, for Bitcoin transactions. However, virtual currencies are volatile and involve high risk. For example, the value of a Bitcoin went from pennies to $1,200 in a five-year period, and then back down to around $500, where it rested as on April 22, 2014.

U.S. tax treatment

The IRS acknowledged that virtual currency may be used to pay for goods or services, or held for investment. The IRS issued guidance providing answers to frequently asked questions (FAQs) about virtual currency, offering Bitcoin as an example. The FAQs at present provide only basic information on the tax implications of transactions in, or using, virtual currency.

Property. Notice 2014–21 states that virtual currency will be treated as property for U.S. federal tax purposes. As such, it is governed by the same general principles that apply to property transactions generally. The sale or exchange of convertible virtual currency, or its use to pay for goods or services in a real-world economy transaction, has immediate tax consequences that would not apply if it were considered pure “legal tender.”

Conversion required. A taxpayer who receives virtual currency in payment for goods or services is required to include the fair market value of the virtual currency in computing gross income. This value must be measured in U.S. dollars as of the date the virtual currency was received. The basis in virtual currency is its fair market value on the date of receipt, determined by converting the virtual currency to U.S. dollars (or another real currency which can be converted into U.S. dollars) at the applicable exchange rate in a reasonable manner that is consistently applied.

Capital gain or ordinary income. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. If the virtual currency is held as inventory, for example, for sale to customers in a trade or business, gain or loss on its disposition will be ordinary gain or loss. If the virtual currency is held as an investment, gain or loss on its disposition will be capital in nature.
It remains unclear whether Bitcoins will be treated as “coins” for purposes of the 28 percent capital gains rate on collectibles; or whether they will be considered a permitted investment within individual retirement accounts or in other, similar circumstances.

A taxpayer who creates, or mines, virtual currency realizes gross income on receipt of the virtual currency resulting from that activity. The fair market value of the virtual currency as of that date is includible in gross income.

Information reporting. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. Thus, a person who makes a payment of fixed and determinable income using virtual currency with a value in excess of $600 to a U.S. non-exempt recipient is required to report the payment to the IRS and to the payee. This includes payment of rent, salaries, wages, premiums, annuities, and compensation.

Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W–2, and are subject to federal income tax withholding. Also, payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply to such payments. Payers using virtual currency must normally issue Form 1099 to the payee.

Penalties. Taxpayers who fail to report their income from virtual currency may potentially be subject to tax penalties. At the April 2 House Committee’s Bitcoin hearing, L. Michael Couvillion, Professor, Plymouth State University, New Hampshire, pointed out that taxpayers who treated virtual currencies inconsistently with IRS Notice 2014–21 before it was issued will not receive penalty relief unless they can establish that their underpayment or failure to properly file information returns was due to reasonable cause. This will require many businesses and individuals to go back and determine the existence of gain or loss on transactions that occurred in the past, perhaps several years in the past.

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Bitcoin is really just another form of gambling. Hardly anyone uses bitcoin to buy things,

I have been hearing that from the beginning, and yet, here we are. Why don't you think it will end well? When do you think the end will come? 2 years, 5 years, 100 years? Anyone can say, I don't think x stock/company will end well and never be wrong no matter how well something does in the meantime, with a chance to be right.
Back in 98/00 who would have guessed AOL would have went down the tubs so fast? I had a feeling them buying Time Warner was bad news.
Amazon... really? I didn't get it, I thought they were just going to sell books online.

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Hi Bill,
Would you mind identifying the exchange that had low charges? With Bid/Offer spread on the exchange rate, I usually expect it to cost a few percent.

As I said, it is my gut feeling. I have no evidence or expertise to support it. Just my feelings.

Ok guys... Let's say I have the equivalent of $100k of Bitcoin in my coinbase account. I want to transfer ....
1. $5k to my bank account.
2. $5k to my car dealership to pay for repairs.
3. $5k to BillyRyan's coinbase account to buy a comic book.
4. $5k in cash to friend who has no crypto account.
5. $5k to the IRS to pay my tax bill.
What charges/fees/transaction costs will each of the examples cost? Can I actually accomplish all 5?

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It is, actually quite a handy currency for doing business with online casinos. No need to give some shady casino your credit/debit card or bank info and no need to trust them with paypal.

Your car dealer just needs to give you their public key. Billy the same.
The rest you need to sell on the exchange to turn into cash then do an ACH transfer.

So what is skimmed off in 1-5?

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