Bitcoin and taxes for US residents
Last time, I wrote about the basics of Bitcoin – what it is, why it could be good for you and what the risks of using it are. In this post, I’ll touch on the tax implications that come with using Bitcoin in various ways, at least for US citizens and residents.
The IRS looks at Bitcoin
In 2014, the US Internal Revenue Service issued a ruling on the subject of bitcoin to clarify how it views the virtual currency. While many expected the IRS to find that bitcoin should be treated as a currency, they took a different tack.
The IRS ruling says that bitcoin is considered “property” under US tax law. Because of this, certain things are true regarding:
- employee and independent contractor wages that are paid in bitcoin;
- buying and selling bitcoin; and
- making purchases with bitcoin.
Note: these rules apply to all types of “convertible virtual currency.” This means any virtual currency that has an equal value in traditional currencies and can be converted to real currency. Bitcoin, of course, falls under this category.
The IRS ruling says that bitcoin is considered “property” under US tax law.
The IRS made several important pronouncements regarding virtual currencies and how they are to be treated under US tax law. For instance, payments for goods and services made in virtual currencies must be accompanied by the equivalent value in US dollars on the day they’re received, so they can be used in computing gross income. The same goes for mining bitcoin, which also counts as income with a “basis” (initial value) of whatever the market value of the bitcoin was on the day you mined it.
You use this “basis” (meaning the value of the bitcoin) for tax purposes. If property exchanged for that amount of bitcoin is valued either higher or lower than the basis, you are realizing either a gain or loss for tax purposes. This could incur tax liability, just like selling a home or any other piece of property that realizes a capital gain.
If property exchanged for that amount of bitcoin is valued either higher or lower than the basis, you are realizing either a gain or loss for tax purposes.
Additionally, when wages are paid, either to an employee or an independent contractor, anything over $600 needs to be reported to the IRS by both the contractor and the employer.
What does this mean for me?
What this means is that, if you’re a US citizen receiving bitcoin for pretty much any reason, it should be reported to the IRS. While it is “virtual” in nature, the IRS certainly doesn’t see it that way when taxes are concerned.
I mentioned earlier that many assumed the IRS would see bitcoin as a currency. A bill was introduced into the US House of Representatives in 2014, which would make the IRS recognize virtual currencies as foreign currencies for tax purposes. The bill was not enacted, though.
As always with issues like this, see your tax advisor. They will have a better handle on these rules than me or you, so you should rely on their advice (and not this blog post).
Next time, I’ll discuss some of the laws that govern bitcoin and other virtual currencies, both in the US and abroad.