IRS Warns Taxpayers to Report Virtual Currency Transactions

Virtual currency “is a digital representation of value that functions in the same manner as a country’s traditional currency,” the Notice states.

As it stands now, more than 1,500 known virtual currencies exist, the Notice states.

Notice 2014-21 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, the IRS states, which means that:

• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
• 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-MISC.
• 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.
• Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
• 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.

— Check out Federal Judge Opens Door to CFTC to Regulate Virtual Currency on ThinkAdvisor.