Internal Revenue Service lately has been sending out reminders to people who trade in bitcoins and other financial creations that exist only in the digital world. The message is: Yes, this is all taxable.
Bitcoin is perhaps the best known “cryptocurrency,” or virtual currency, being traded in exchanges on the Internet. The digital encyclopedia Wikipedia says there might be 4,000 types out there.
The currencies are used both as assets like stocks and as payment for purchases like money. Some employees even receive pay in bitcoin. But, while they are not legal tender, they have value. For tax purposes, the IRS classifies all these digital currencies as property, which can be translated in terms of real money.
So. if you make a bundle on a bitcoin trade, the gain is taxable — just as if it were done with stock or any capital asset. Likewise, employers who pay their workers in bitcoin or another digital instrument must convert them to their money value and issue W-2 forms in terms of U.S. dollars to their employees. As you might suspect, those wages also are subject to the same withholding rules as any other paycheck. Ditto for wages paid to self-employed workers and independent contractors
Workers or investors also must use those values when they file their personal tax returns.
The dollar values of many cryptocurrencies can change as they trade on their exchanges. So, the IRS also requires any digital wages to be valued as of the exact date when they are paid.
In July, the IRS announced it was sending letters to more than 10,000 cryptocurrency investors about unreported or improperly reported transactions using virtual currencies.
The tax agency issued its basic guidance about cryptocurrency transactions about five years ago in Notice 2014-21. View it at https://www.irs.gov/pub/irs-drop/n-14-21.pdf
EricJohn owner Eric Buechler can provide more specific advice about cryptocurrency transactions and taxes. Feel free to ask!