Bitcoins and Their Tax Treatment

Bill Roeser, CPA, CFP

Many businesses now accept virtual currency for sales transactions, such as Bitcoins. Despite IRS issuing a set of FAQs last year regarding virtual currency, the U.S. federal tax implications remain relatively unknown to many businesses. If you're a retailer or other business who accepts bitcoins for transactions, here's what you need to know regarding their treatment for tax purpose.

Sometimes, bitcoins operate 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 method and medium of exchange in the country of issuance.

However, Bitcoins do not have legal tender status in every jurisdiction. However, if you've been paid in virtual currency, you should be aware that virtual currency is treated as property for U.S. federal tax purposes. In other words, general tax principles that apply to property transactions also apply to transactions using virtual currency. This means that the following will apply:

  • Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules apply. So, if you own a business that receives Bitcoin as payment for goods or services, it is taxable.  
  • 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.  So in most cases, any value increases or decreases of Bitcoins will be treated as a capital gain or loss when sold or used in commerce.  This adds an additional layer of complexity to their use.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.  So, payments made to unincorporated vendors must be sent a form 1099 at year-end reporting the transaction if over $600.
  • Wages paid to employees using virtual currency such as Bitcoin are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

We are seeing an increase in Bitcoin use for businesses and there are many aspects that are not fully understood.  Please don’t hesitate to contact one of the many CPA’s at Roeser Accountancy with any questions.

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