Bitcoin Fans Rejoice in IRS Ruling

The United States will tax bitcoin and other virtual currencies as property, the IRS announced on Tuesday.

Virtual currency will be treated as property for U.S. federal tax purposes, and transactions in virtual currency will be subject to general tax principles.

Taxpayers who receive virtual currency as payment for goods or services must calculate that payment at the currency’s fair market value in U.S. dollars as of the date that payment was received.

That includes taxpayers who mine virtual currency.

Virtual currency exchanges will have to report payments made to merchants on a Form 1099-K if they settle more than 200 transactions for a merchant, and the gross amount of payments made to that merchant exceeds US$20,000 in fair market value on the date of payment.

“This guidance should help provide clarity for taxpayers,” IRS spokesperson Dean Patterson told the E-

Ruling Provisions

Employers who pay staff with virtual currency must report it on a W-2, and the wages are subject to U.S. federal income tax withholding and payroll taxes.

Virtual currency payments made to independent contractors and other service providers are subject to self-employment taxes.

Taxpayers can incur gains or losses when exchanging virtual currency for other property. This can be either capital gains or losses, or ordinary gains or losses, depending on whether the virtual currency is a capital asset in the taxpayer’s hands. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

Payments made using virtual currency are subject to information reporting to the same extent as any other payments made in property.

Virtual currency payments of $600 or more to an independent contractor must be reported on a Form 1099 just the same as payments made in traditional currency.

Payments made in virtual currency are subject to backup withholding to the same extent as other payments made in property.

Taxpayers may be penalized for failing to comply or report correctly and in a timely manner, as is the case with traditional currency.

Nothing New Under the Sun

“The ruling wasn’t unexpected,” Mike Jude, a program manager at Frost & Sullivan told the E-Commerce Times. “Compensation is compensation, whether you’re paid in dollars or bags of wheat, as far as the IRS is concerned.”

However, accounting will be “very difficult” because bitcoin is a virtual currency with highly variable market values, Jude pointed out.

Joy to the Bitcoin World

The ruling “is a very good thing from a business standpoint, because it answers the lingering question of what the [U.S.] government is going to do with bitcoin,” Stephanie Wargo, BitPay’s vice president of marketing, told the E-Commerce Times. “We all knew the IRS was going to get their cut and this takes the ambiguity out of the way.”

This “makes the naysayers go away,” Wargo continued. “It proves that bitcoin is definitely not nothing. We’re quite excited.”

BitPay has been issuing 1099s to its merchants for the past two years.

BloomNation’s Rationale

BloomNation, an online consumer marketplace serving more than 2,000 florists nationwide, will continue taking payments in bitcoin, CEO and cofounder Farbod Shoraka told the E-Commerce Times.

“Bitcoin gives us a whole new demographic to reach out to,” Shoraka said. We’re opening access to florists to something they’ve never been able to do. This will never change due to tax issues.”

Getting the Tax Dollars

Those who use virtual currency to avoid taxes, government tracking or as a hedge against possible default by governments might not pay heed to the IRS ruling or declare their transactions, Frost’s Jude suggested.

“The IRS pronouncements depend on people being honest,” he remarked. “I think the attitude of people who use bitcoins will be ‘prove that I have them and catch me if you can.'”

Richard Adhikari

Richard Adhikari has written about high-tech for leading industry publications since the 1990s and wonders where it's all leading to. Will implanted RFID chips in humans be the Mark of the Beast? Will nanotech solve our coming food crisis? Does Sturgeon's Law still hold true? You can connect with Richard on Google+.

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