Virtual Currencies and Income Taxes
Just as any other currency, a virtual currency might be used to pay for goods or services or used in form of an investment.
Generally, virtual currencies are a digital representation of value that functions as a medium of exchange. Virtual currencies have an equivalent value of another real currency e.g. US Dollar, Euro etc. The might be accepted as a medium of exchange or payment bu as of now they do not have a legal tender status in any jurisdiction.
Virtual currencies are traded and exchanged digitally between buyers and sellers of the currency. Read more here about what to consider when selling virtual currencies.
More detailed information on Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.
Generally, virtual currencies have tax consequences that may result in a tax liability.
Virtual currency and taxes
A virtual currency is treated as property, thus it is treated as a property transactions. Thus, it is not treated as a currency that could generate foreign currency gain or loss.
If a virtual currency is used to pay for goods or services, for tax purposes it is treated as U.S. dollar fair market value. See Publication 525, Taxable and Nontaxable Income and exchanges involving property or services. Plus Publication 551 regarding the Basis of Assets for computing of the cost basis value. The fair market value of a virtual currency in U.S. dollars is based on the date of payment or receipt.
For example, if a virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has to report a taxable gain. This is also the case if there is a gain or loss in exchange of virtual currency for other property e.g real estate etc. See more information about the Sales and Other Dispositions of Assets.
If a taxpayer mines a virtual currency, the virtual currency fair market value is set as of the date of receipt of gross income. See more information about Taxable and Nontaxable Income.
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, if a person makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to both the payee or recipient and the IRS via Form 1099–MISC. Payments of virtual currency need to be reported using in U.S. dollar based on the fair market value of the virtual currency as of the date of payment as outlined above.
More information on:
FinCen FBAR Report 114
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