The Internal Revenue Service sounded a loud warning shot today for all you Bitcoin users: Stop calling it a virtual “currency.” In the eyes of the taxman, it’s anything but – and that means taxpayers now must confront a raft of ways in which Bitcoin must be reported and taxed.
In a wide-ranging Q&A, the IRS laid out a number of other ways that Bitcoin can be taxed – as an asset, as income, as payment in property, as a transaction, even as self-employment income by all those “miners.” No matter which approach applies, every one puts the onus on some player to report Bitcoin activities to the IRS -- creating a paper trail that enables the taxman to perform the simplest of computerized matching to generate letter “audits” asking taxpayers to explain why they failed to report a taxable event. The IRS stance builds on the assumption that Bitcoin is not a currency for a simple reason: “It does not have legal tender status in any jurisdiction.” That then sets of a cascade of practical questions for individual taxpayers, “miners,” small businesses, brokerages, and other players to confront. For example:
- Are you paying employees in Bitcoin? Then pay attention to the employment taxes and withholding requirements for things like FICA – and kick out a W-2 at year’s end.
- Are you paying a contractor more than $600 in Bitcoin? Then kick out a 1099 so the IRS can ask the recipient about their unreported income, and backup withholding could apply.
- Are your hands grubby from tunneling in search of Bitcoin? That could constitute a trade or business and be subject to self-employment income.
- Are you cashing in your Bitcoin at an exchange or through a brokerage? Then you should receive tax-filing reports at the end of the year, and then the IRS will examine your capital gain or loss.
- Are you settling payments between merchants? Then you’ve got to tell the taxman who you dealt with. And here’s the concluding warning from the IRS: Penalties could apply retroactively, not just from March 25 onward. So, be on notice all you speculators who profited as Bitcoin jumped nearly tenfold to more than $1,100 in November. The IRS – and probably your state, too – want a share. Happy April 15.