Virtual Currency Guidance
We have been getting A LOT of questions lately from clients regarding Bitcoin or “Crypto currency”. The IRS refers to this as “virtual currency”. Questions range from whether this is reportable on FBAR or FORM 8938; or whether it is taxable and how.
The last guidance from IRS and FINCEN was provided in 2014. You can find these below a quick overview of the essentials.
FBAR / FORM 8938
As “property”, it is not a foreign financial account and not reported on FBAR or Form 8938. I expect this will eventually change.
Virtual currency is considered “property”, not money. This is because it is not legal tender issued by any government. This complicates taxation because many times people use it like money, paying for services and products. Please note the following items:
Information reporting on Forms 1099: If paying independent contractors with virtual currency, and the transaction if it had been done in a “real” currency (like USD), and otherwise would qualify for issuing of a 1099-MISC, then a 1099 should be issued to the recipient. Likewise, other payments such as interest & dividends (1099-INT, 1099-DIV), third party credit card payments (1099-K), and the like, would also apply and be required to be issued.
Income Tax – Broker/”Miner”: A person who “mines” or facilitates the transactions is engaged in business. Their compensation is either wages as a W2 employee of a company, or they are self-employed (Schedule C). If paid in virtual currency, the amount of compensation must be converted to US dollars.
Income Tax – Account USER: When you either sell, exchange, or spend it, you have a reportable gain or loss on EACH transaction. Fair Market Value must be determined in US Dollars for both basis and proceeds, by converting the virtual currency amount into the US dollars based on market rate, or if not directly convertible to US dollars (aka, if the virtual currency does not have a US dollar market value) then must be converted into another real currency (like Euros for example) that CAN THEN be converted to US dollars as of the date of the transaction. The IRS states that when converting to/from US Dollars, it should be “in a reasonable manner that is consistently applied.” In most cases, it is reported as a capital gain or loss. If used to purchase an asset or service in the taxpayer’s business, then it is a deductible (or depreciable) item on the business tax return.
If you are unsure whether or not this applies to you or if you need help filing please contact Morey Glazer by phone at 972-385-0007 or by email at firstname.lastname@example.org.