Bitcoin and Other Cryptocurrencies
What is Bitcoin?
Bitcoin is a new currency that was created in 2009. Transactions are made in a decentralized network. Bitcoin can be used online to purchase most items and the use of which has been steadily increasing. Bitcoin uses blockchain technology without the need of a trusted authority or central server
What is blockchain?
Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.
Why should I care?
As we see a growing use of virtual currencies, we also see an increasing need to regulate. With increased regulations comes tax issues.
According to the IRS, virtual currency 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.
The IRS provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- 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 and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- 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.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted on IRS.gov.
At HerrickGlobal, we can give you peace of mind that comes with knowing you won't face the unknown alone. Our highly trained advisors can handle all your tax filing needs quickly and efficiently. Schedule an appointment today - we look forward to meeting you!