Following the growth in the number of environments and situations where virtual currency, such as Bitcoin, operates as ‘real’ currency, the IRS has announced that virtual currency will be treated as property for tax purposes, rather than currency.

The IRS has provided guidance on the tax implications of transactions using virtual currency. Currently, in some environments, virtual currency operates in the same way as paper and coin money, yet it does not have legal tender status in any jurisdiction.

Under the new guidance, virtual currency will be treated as property – rather than legal tender currency – meaning that general tax principles relating to property transactions will also apply to any transaction in or using virtual currency.

What Does This Mean For US Persons?

With the increase in use of virtual currency as a salary payment, payment for independent contractors or service providers or a source of income for virtual currency ‘miners’, the new guidance will impact US persons with tax obligations in the following ways:

1. Salaries paid in virtual currency are taxable to the employee, subject to income tax withholding and payroll taxes and as such must be reported on Form W-2
2. Payments made to independent contractors/service providers using virtual currency are taxable and will generally be subject to self-employment tax rules. As such, individuals will be expected to submit Form 1099 to the IRS
3. Any income received in virtual currency must be reported to the IRS in US dollars. This means that US persons will be required to determine the fair market value of the virtual currency in US dollars, as of the date of payment or receipt
4. The character of the gain or loss from the sale or exchange of virtual currency depends on whether it is a capital asset in the hands of the taxpayer. For more information, please see Notice 2014-21 on the IRS website
5. Any payment made using virtual currency is subject to the same information reporting as any other payment made in property
6. As with any failure to comply with tax laws, US persons failing to comply with the new guidance may be subject to a number of penalties, including accuracy-related penalties (section 6662) and information reporting penalties (section 6721 and 6722). However, penalty relief may be available to persons who can prove reasonable cause for any underpayment or failure to properly file

If you receive payment in any form of virtual currency, or are unsure how the new guidance will affect your tax obligations contact us.

For further information on the action you need to take before the US tax payment deadline, see our guide to the 15 things you must consider before 15th April.