More Bitcoins, More Problems

Published On March 28, 2014 | By Dan Sachs | General
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The IRS wants businesses and individuals to know that using Bitcoin or other “convertible virtual currency” has tax consequences.

As recently-issued IRS guidance explains, “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.” The guidance does not apply to virtual currency that is not “convertible,” such as virtual coins in an online game that can only be exchanged in-game for other virtual objects.
According to the IRS, a person accepting convertible virtual currency as payment must report the fair market value of the virtual currency as of the day of receipt as gross income. A taxpayer may also realize either “capital” or “ordinary” gain or loss on virtual currency transactions. In addition, virtual currency “mining” may be subject to income and self-employment taxes. Furthermore, virtual currency payments to employees and independent contractors may be subject to associated taxes and reporting and withholding requirements. In certain circumstances, companies that contract with merchants to settle their virtual currency transactions with customers may also be subject to IRS reporting requirements.

The IRS guidance comes a year after U.S. Treasury guidance warning that a person exchanging Bitcoin for currency or other value substituting for currency is a “money transmitter” subject to FinCEN rules.

About The Author

Dan Sachs, ZwillGen’s inaugural Fellow, assists ZwillGen attorneys on a broad range of matters, including litigation, investigations, product counseling, regulatory compliance, and policy. Prior to joining the firm, Dan worked at Facebook, where he assisted the Chief Privacy Officer for Policy in responding to federal, state, and international policy developments, engaging with regulators and stakeholders, and advising business units on privacy issues. During law school, Dan was a member of the George Washington Law Review and served as a research assistant to Professor Jeffrey Rosen, focusing on U.S. and international consumer privacy and surveillance issues. He was a legal intern with ZwillGen in the summer of 2012. Dan also worked as a legal intern with the U.S. Attorney’s Office for the District of Columbia.

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