Bitcoin has been in the news quite a bit recently, as the controversial virtual currency continues it’s up-and-down trend after being released in 2009. Bitcoin is an unregulated virtual currency that can be sent from person to person, though it is not backed by any commodity nor is it accepted by any country as legal tender.
However, the Internal Revenue Service (IRS) finally recognized Bitcoin — but not as a currency. The IRS has deemed Bitcoin a piece of property, a simple but impactful decision that will have a wide range of effects on people who use Bitcoin, have completed transactions with the virtual currency or rely on it for business purposes.
Since Bitcoin is now recognized as property, it is subject to all the rules that govern property. For example, if someone is paid in Bitcoin for their wages, it must be reported on a W-2. If a business accepts Bitcoin for transactions, the IRS will tax it at “fair market value.” If Bitcoin is used as a capital asset, then it would be subject to capital gains taxes. Bitcoin “miners” — people who obtain Bitcoin by solving math equations — will have to report the virtual currency on their taxes, and would also be subject to self-employment taxes.
It all may seem very silly, but our technological society is clearly heading in this direction. Digital currencies will likely become a crucial part of many people’s taxes in the coming years, and it could be even more important for businesses.
Source: USA Today, “IRS: Bitcoin is not currency,” Kevin A. Kepple and Jeff Dionise, March 25, 2014
