While some are confused about Bitcoin (BTC), others have profited from this cryptocurrency. If you or your business includes Bitcoin as a profit strategy, you may have questions about its taxability. Here are a few questions and brief answers from Pacific Tax & Financial Group.
How is virtual currency like Bitcoin handled for federal tax purposes?
The IRS treats virtual currency as property when it is held as a capital asset. Bitcoin transactions resulting in a loss or gain will incur a capital gain or loss tax (about 15% for the majority of taxpayers). Cryptocurrency transactions not retained as a capital asset will fall under the ordinary gain/loss tax rules.
If a taxpayer receives BTC as payment for products or services, how should they determine gross income?
Calculate the fair market value of the BTC received as payment. The calculation is acquired by converting it to the current U.S. dollar rate. There are several cryptocurrency sites that calculate the exchange rate daily.
Is virtual currency paid to an independent contractor for work performed considered self-employment income?
Any legal currency paid to a person in exchange for labor falls under the umbrella of self-employment income. Consequently, virtual currency is subject to taxation. If a person is paid in BTC, they are responsible for the tax of its value the day they receive it.
Does cryptocurrency paid by an employer for services count as wages for employment tax purposes?
Yes, it is. The market value of the cryptocurrency used as payment to any employee must be reported on a W-2 with its federal income tax withholding accurately calculated.
If a company pays an independent contractor with Bitcoins, must the payer file an information return with the IRS?
Once the independent contractor’s wages surpass $600 within a year, the employer is responsible for supplying the contractor with a 1099-MISC and reporting the payment to the IRS.
If you “mine” cryptocurrency, do you have to count it as gross income?
Yes. The value of the mined cryptocurrency is categorized as taxable income.
If someone mines Bitcoins as their personal business, is the income subject to self-employment tax?
Yes, but only if the person does so as an individual enterprise and not as part of a mining pool.