IRS rules that bitcoins are property
The Internal Revenue Service says it’s going to treat bitcoins as if they are property.
For tax purposes, the IRS will apply to bitcoins the same general tax principles as it does to property tax transactions. The IRS said that bitcoin does not have legal tender status in any jurisdiction.
By declaring bitcoin to be property, the IRS has answered a lot of questions. For employers, it means that wages paid to employees using virtual currency are taxable to the employee, must be reported by the employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
In addition, payments using virtual currency made to independent contractors and other service providers are taxable and subject to self-employment tax rules. A company will have to issue a 1099 form to any independent contractor it pays in bitcoin. In similar fashion, vendors receiving bitcoin as payment must consider the payment as income and pay taxes on it.
The IRS has set the value of the bitcoin for taxation purposes as its value on the day it is received as a payment by the employee, contract worker or company. Employers paying in bitcoin and employees regularly receiving payment in bitcoin must both keep accurate track of the value of the bitcoins on the day of each payment.
If the bitcoin is a capital asset to the taxpayer the taxpayer will be able to pay taxes based on the capital gains rate, which is generally lower that the rate for income.
Businesses can find extensive information about their reporting requirements for bitcoin payments in notice 2014-21, available at the IRS website.
— Herb Wolfson, Wittlin, Simon & Newman, email@example.com
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