IRS: Bitcoin is property not money

Michael Cooney

Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

Does a taxpayer who "mines" virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?Yes, when a taxpayer successfully "mines" virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.

Is an individual who "mines" virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?If a taxpayer's "mining" of virtual currency constitutes a trade or business, and the "mining" activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.

Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income ta x withholding, Federal Insurance Contributions  Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

Most of the news around Bitcoin has been negative of late. Just last week the The IDG News Service wrote that the software driving Bitcoin's network was upgraded, with security fixes addressing a problem that defunct bitcoin exchange Mt. Gox blamed for losing nearly half a billion dollars worth of bitcoins. Upgrading Bitcoin's software is a delicate operation, and many of the changes have been under discussion for months. The market capitalization of all bitcoins in circulation is roughly $8 billion, according to figures from Blockchain.info, and a mistake could be costly.

But the virtual currency has weathered innumerable negative events over the past five years and is still seeing growing adoption by businesses and retailers as an alternative payment platform. The value of a bitcoin wobbled only slightly after Mt. Gox, at one time the largest bitcoin exchange, filed for bankruptcy protection in Tokyo District Court on Feb. 28 and in U.S. Bankruptcy Court for the Northern District of Texas on March 9, The IDG News Service  story stated.

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