The IRS recently issued a statement with information on the tax implications of using Bitcoin and other virtual currencies. The notice explains that virtual currency is treated as property for U.S. federal tax purposes. So general tax principles that apply to property transactions will also apply to transactions using virtual currency.
Here’s what it means:
- Wages paid to employees using virtual currency are taxable—they must be reported by an employer on a Form W-2, and they are are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and freelancers are also taxable—self-employment tax rules apply. Payers will need to issue a Form 1099.
- In the case of a sale or exchange of virtual currency, it would be considered a gain or a loss depending on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to the same information reporting as any other payment made in property would be.
A full Q&A is available from the IRS in Notice 2014-21.