The obvious question: Why should I take the time to learn about Bitcoin? The answer: Bitcoin is a form of virtual currency that is gaining attention from the Internal Revenue Service (IRS). Bitcoin is virtual money that relies on exchanges to determine the value of Bitcoin on a daily basis. A Bitcoin exchange is similar to a stock exchange which displays the current fair market value (FMV) of stock in the open market. Currently, one Bitcoin equals $230.00.
Individuals and businesses can use Bitcoin to purchase goods and services online or purchase Bitcoin as investments that can increase or decrease in value over the years to come. Mainstream retailers such as Amazon, Google, and Overstock.com are now accepting Bitcoin as a payment option.
Bitcoin is transferred from computer to computer on a peer-to-peer basis without the use of banks or financial institutions. The Bitcoin currency system lacks a centralized monitoring system, and this has prompted the IRS to create some guidance for individual taxpayers and business owners using Bitcoin as a form of payment or investment.
According to the IRS, virtual currency is treated as property for tax purposes. The general tax principles that apply to property transactions apply to transactions using virtual currency. Taxpayers need to recognize gain or loss on the exchange of virtual currency for other property. For example, gain or loss would be recognized every time Bitcoin is used to purchase goods or services. Keeping up with the cost basis for each Bitcoin transaction can be a potential nightmare for a taxpayer. Luckily, there are Bitcoin exchanges that can assist a taxpayer in determining the FMV of the Bitcoin at the time of the transaction.
Take note: if you are currently using Bitcoin for personal use or as a form of payment in your business, then you need to be keeping detailed records of each transaction. Maintaining a recorded history of your Bitcoin transactions will help you when it is time to sit down with your certified public accountant (CPA) during tax season. A CPA will help identify the important information that needs to be obtained from the Bitcoin exchanges for determining any gains or losses that need to be recognized for tax purposes.
With regard to virtual currency, the IRS does provide some guidance for taxpayers in the form of Notice 2014-21. Below are a few main points that can help you identify taxable Bitcoin transactions that need to be reported to the IRS. Once identified, sit down with your CPA and discuss the tax implications of using Bitcoin.
- Bitcoin is treated as property, similar to stocks. Just like stocks, the short-term and long-term gains and losses from Bitcoins will need to be reported on the tax return.
- A taxpayer who receives Bitcoin as payment for goods or services must, in computing gross income, include the FMV of the Bitcoin measured in U.S. Dollars, as of the date that the Bitcoin was received.
- A taxpayer generally realizes capital gain or loss on the sale or exchange of Bitcoin that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment properties are generally capital assets.
- A person who in the course of trade or business makes a payment using Bitcoin with a value of $600 or more is required to report the payment to the IRS and to the payee. Examples of payments include rent, salaries, wages, premiums, annuities, and compensation.
Reporting Bitcoin transactions might seem complicated for a taxpayer who is reporting these transactions for the first time this tax season. Make the smart move and sit down with your CPA to discuss how to properly report Bitcoin transactions on your upcoming tax return.
If you have questions about Bitcoin transactions or other tax-related matters, contact the experts listed below at PYA, (888) 420-9876.
