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.

About Mark Schwanhausser

Mark Schwanhausser is JAVELIN’s Director of Omnichannel Financial Services. Mark strategizes how financial institutions (FIs) can track and serve customers across whatever channels they use, and provide a consistent, integrated brand and user experience. Mark helps banks and credit unions profitably enable customers to monitor and manage their money more intelligently through technology such as online banking, mobile banking, personal finance management, financial alerts, and technologies on the horizon like wearables.

Mark led the development of JAVELIN’s Financial Journey Model, which builds digital banking on a foundation of 10 time-tested personal finance principles, and JAVELIN’s holistic segmentation, which enables FIs to prioritize their investments to serve the critical needs of the profitable Moneyhawks™, high-value Traditionalists, and up-and-coming Emergents. His other work in 2015 has focused on how banks and billers can turn off paper statements by closing the “digital commitment gap,” why digital account opening has reached a tipping point, and how FIs can use alerts and notifications to initiate daily “conversations” with customers.

Before joining JAVELIN in April 2008, Mark worked for nearly 26 years at the San Jose Mercury News, mostly as a personal finance reporter writing about money and emerging trends in financial services and payments technology.

Mark has a bachelor’s degree in journalism from the University of Missouri at Columbia and attended Antioch College.

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