- New IRS guidance treats Bitcoins and other crypto-currencies not as money, but as property, for tax purposes and applies immediately to all returns. See the full text of Notice 2014-21. IRS Virtual Currency Guidance
- Regardless of what Bitcoin’s creators and promoters may say, as far as the IRS is concerned, bitcoin is not money or currency. The IRS will treat bitcoin holdings much like corporate stock or other property (IRS Notice 2014-21).
- Bitcoin are created by a digital “mining” process and is not backed or regulated by any government, central bank or other legal entity. Some claim this makes Bitcoin safer than traditional currency because its value can’t be manipulated by central banks or governments.
- Bitcoin can also be directly transferred anonymously across the Internet. This can make the Bitcoin a cheap way to settle international transactions because there are no bank charges to pay or exchange rates to deal with.
- No one has to accept Bitcoin as money. Nevertheless, a growing number of merchants are accepting them. In fact, a Manhattan real estate broker recently announced that it would start accepting payments in Bitcoin.
- Interestingly, people buy and sell Bitcoin for dollars on online exchanges — much like gold.
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, Wage and Tax Statement, 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.
- Payments made using virtual currency will be subject to the same information-reporting rules as any other payment made in property.
- The IRS warns that taxpayers who treated virtual currencies in a manner inconsistent with IRS Notice 2014-21, before the date the notice was issued, will not get penalty relief, unless they can establish that their underpayment or failure to properly file information returns was due to "reasonable cause".
inmanNEWS, "IRS’ Bitcoin Guidance Turns Every Transaction into a Reportable Capital Gain or Loss at Tax Time", Stephen Fishman, Contributor, March 31, 2014
IRS Notice 2014-21
Journal of Accountancy, "New Guidance Clarifies Tax Treatment of Bitcoin and Other Virtual Currencies", Alistair M. Nevius, JD, March 25, 2014
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