The Department of the Treasury’s, Internal Revenue Service or IRS issued a notice wherein it elaborates how existing general tax principles apply to transactions using virtual currencies like Bitcoin, Litecoin, etc. Available in the form of answers to frequently asked questions, the information will help individuals manage their taxes.
According to the press release, virtual currencies shall be treated as property for federal tax purposes in the US. It clears that digital currencies not treated as currency that can generate foreign currency gains/losses. Similarly, the government agency has requested taxpayers to determine the fair market value of their virtual currency for tax purposes.
There are some interesting points that taxpayers need to keep in mind when filing for returns; for instance, they have been asked to report gains/losses upon exchange from virtual currency to fiat currency. The press release says that for federal tax purposes, virtual currency is treated as property.
It is to be noted that general tax principles applicable to property transactions apply to transactions using virtual currency as well. Whether virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws, the notice says that there is no such provision under the existing law.
Greater Implications for Bitcoin Miners
It further clarifies that under the existing law, virtual currencies like Bitcoin and Litecoin are not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.
However, it says that an individual who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in US dollars for the tax purposes.
The crucial question from Bitcoin miners was whether they would be taxed if they use 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.
The release says that 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 and taxed accordingly. Similarly, to the question whether an employee who is paid in digital currencies for his services would be considered wages for taxation purpose, the press release says that yes.
To contact the reporter of this story: Deepak Tiwari at firstname.lastname@example.org