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Virtual Currency / Bitcoin

Please note Cryptocurrencies (such as Bitcoin, Litecoin, and Ethereum) are reportable to the IRS and its use to pay for goods or services may result in a tax liability. Virtual currency, such as Bitcoin, is digital currency that only exists as digital information; there are no physical Bitcoins, for example. This currency is not regulated or controlled by any country or bank. On November 30, 2016 a federal district court issued an order authorizing the IRS to serve a John Doe summons on virtual currency exchanger Coinbase, Inc. to issue the names of bitcoin holders and their 2013 - 2015 transaction information for U.S. tax payers. Although enforcement of the summons is being fought by Coinbase users, similar summonses used with Swiss Banks in years past have resulted in the release of information.

Currently the IRS treats virtual currencies as property, not currency. As such, the following applies:

  • Wages paid to employees in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to federal income tax withholding and payroll taxes.
  • Taxpayers who successfully “mine” virtual currency must include in gross income the FMV of the currency on the date it is mined. This income may be subject to self-employment taxes.
  • Payments made to independent contractors in virtual currency are taxable, self-employment rules apply, and the payors must issue a Form 1099.
  • Gains and losses for the sale or exchange of virtual currency are reportable and considered a short-term gain if held for one year or less, or a capital gain if held for more than a year. Capital losses are subject to the $3,000 capital loss limitation.
  • Payments made using virtual currency are subject to information reporting and backup withholding just like any other payment made in property.

You are responsible for informing MLK if you have used, received, or sold any bitcoin in the last few years, and securing necessary information for reporting, such as:

  • Date virtual currency was purchased, mined, or received
  • How much was given up, traded, or received
  • Price of virtual currency when it was received
  • Price of whatever goods and services were bought or received
  • Description of what was bought and sold
  • Substantiating documents such as receipts, statements from the mining pool if you are mining the currency, or invoices if the currency is received in exchange for goods or services.