31st March 2014
Bitcoin has had its ups and downs of late, but until recently there has only be uncertainty surrounding how virtual currencies should be treated for tax.
Now, the Inland Revenue Service (IRS) has confirmed its stance, just as Japan outlined how it will view Bitcoin and other virtual currencies.
In a statement, the IRS said that virtual currencies can, in some environments, operate like “real” currency, but it “does not have legal tender status in any jurisdiction”.
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency,” said the IRS. In addition, it confirmed that virtual currencies are not treated as “real” currency that could generate foreign currency gain or loss for US federal tax purposes.
Any person or entity that receives virtual currency as payment for goods or services must include the fair market value of the virtual currency, measured in US dollars, as of the date that it was received.
There was also an important element for so-called Bitcoin ‘miners’. “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,” the IRS explained.
Businesses may also use Bitcoin to pay employees; something that the IRS seems perfectly happy with. “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,” it said.
The move should satisfy those who have been calling for clarity. In January, Nina Olson, the National Taxpayer Advocate, said the IRS should give taxpayers clear rules on how it will handle transactions involving Bitcoin and other digital currencies.
It comes after Japan had earlier outlined in a preliminary assessment that Bitcoin and other virtual currencies could be taxed. The currencies could come under income, corporate or consumption tax laws, though the position of the Japanese authorities is yet to be decided.