Article Highlights:
Payment for Goods & Services – A taxpayer subject to U.S. taxation who receives virtual currency as payment for goods or services must, in computing gross business income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.
Acquiring Virtual Currency – One can go to online exchanges and purchase virtual currency. But care should be taken to make sure the exchange is reputable. Once you have the virtual currency in your online wallet, you are free to spend it with anyone who accepts that form of currency.
Virtual Currency Mining – Mining is a term used to describe how cryptographic information distributed within a virtual currency network is secured, authorized, and approved. In essence, it is the processing of payments that have taken place once they occur. It takes the place of banks, merchants’ accounts, and clearing houses like Visa. It essentially eliminates all of the third parties’ cuts of income from the transaction. It involves complex mathematical logarithms that need to be solved, and the mining process completes this task autonomously. For individuals who mine virtual currency, it is a trade or business, and they are subject to self-employment tax.
Apparently, virtual currency miners are also subject to Form 1099-K filing requirements if their transactions rise to the reporting threshold. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third-party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third-Party Network Transactions. If, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200 and (2) the gross amount of payments made to the merchant exceeds $20,000, then 1099-K filing is required.
Employee Payments – If an employee is paid in virtual currency, then the fair market value of the virtual currency, measured in U.S. dollars, paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax (Social Security and Medicare A), and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. The U.S. government doesn’t accept virtual currency for tax payments.
Independent Contractor Payments – The fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income to the independent contractor and is subject to the self-employment tax. Payments are subject to the normal 1099-MISC reporting requirement when the payments for the year measured in U.S. dollars are $600 or more.
IRS Enforcement Actions – Because fewer than 900 taxpayers reported virtual currency gains and losses each year on their tax returns from 2013 to 2015, the IRS is stepping up enforcement of the rules. Recently, the IRS won a court’s approval for a summons to obtain account and transaction information on more than 14,000 customers from Coinbase, a company that services buyers and sellers of Bitcoins. Based on the success in the Coinbase case, the IRS will likely expand its efforts to obtain information about cryptocurrency account owners from other companies dealing in Bitcoins and similar virtual currencies.
Also, beginning with 2018 returns, Sec. 1031 tax-deferred exchanges will only apply to real property; thus, investors in virtual currency who trade one type of virtual currency for another will be required to report their capital gains/losses and won’t be able to use the 1031 tax-deferral rules.
If you are investing, trading, or dealing in virtual currency and have any questions about how those activities will affect your tax situation, please give this office a call.
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