IRS Notice 2014-21 provides that a virtual currency, such as "Bitcoin", will be treated as property for U.S. federal tax purposes. Therefore, general tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
For additional information contact the law offices of AttorneyBritt.
Further details, including a set of 16 questions and answers, are included in Internal Revenue Notice 2014-21, which can be found at this link: http://www.irs.gov/pub/irs-drop/n-14-21.pdf