IRS rules on Bitcoin: a property, not a currency

Steven Loeb · March 25, 2014 · Short URL:

Payment or wages paid out in Bitcoin subject to same taxes as any other payment made in property

Bitcoin, and other virtual currencies, has been a very, very hot topic for past couple of months, with everyone, and their mother, seemingly weighing in on it's long term viability (as its value fluxuated wildly) and what it means for the future of currency going forward

One important entity that had not said anything about the matter was the Internal Revenue Service (IRS).

That is, until now, when, in a notice issued on Tuesday, the IRS finally issued its decree: Bitcoin, it said, is in fact property, and not a currency. As such, it said, "General tax principles applicable to property transactions apply to transactions using virtual currency."

The reason given for this decision is that while virtual currencies can be used to pay for things, including goods or services, they are not acccepted as legal tender by any country.

"The Internal Revenue Service (IRS) is aware that 'virtual currency' may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value," the IRS said in the note. 

'In some environments, it operates like 'real' currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction."

So what does this mean, exactly?

Frankly, not much when it comes to those who want to use the virtual currencies to buy goods and services. This ruling will only affect  those who own virtual currency, as well as those who received it as a form of payment, or as wages.

This rule will determine how they are ultimately taxed.

In a lengthy Q&A included on the note, the IRS noted that any taxpayer who is paid in virtual currency for goods and services, "must, in computing gross income, include the fair market value of the virtual currency."

The fair market value of the currency is determined, the IRS said, "by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied."

In addition, any payment made in virtual currency has to be reported to the IRS.

"A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property," said the IRS, meaning that anyone who makes a payment that is valued at $600 or more using virtual currency "is required to report the payment to the IRS and to the payee."

As for anyone who is paid wages in virtual currency (which, honestly, sounds like they might have the worst boss in history), they are subject to federal income tax withholding and payroll taxes and the income must be reported on W-2 forms.

"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," said the IRS. Translation: getting paid in Bitcoin means you still have a taxable income.

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