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Bitcoin and Other Digital Currency Are Regarded as Property for Tax Purposes

Posted on in Taxation Law

Digital currency may be a misnomer because, according the United States Government, it is property rather than currency. Regardless of what it is called, digital currency does have value and the owner of the currency must report digital currency transactions on his/her income tax returns or face penalties.

During an American Bar Association webcast that was held on March 25, 2015, government sources said they will aggressively pursue taxpayers who use virtual currency for illegal activities including money laundering, tax evasion and a host of other crimes. The webcast affirmed what the IRS stated in a press release published in March of last year: "IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply."

Bitcoin, the most popular digital currency, has approximately $3.9 billion in circulation worldwide. Each holder of Bitcoin currency obligated to pay US income tax must report the fair market value to the IRS. According to the IRS press release, other requirements include

  • "Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property."

Thus far, the Bank Secrecy Act and the US tax code have been used to pursue individuals who do not report the value of their digital currency. As the popularity of these currencies grows, the IRS and law enforcement agencies will try to rise to the challenge of technologies that develop at an exponential rate. When they identify an alleged tax evader who does not report the value of his/her digital currency transactions, they will likely try to make an example of that individual by imposing the most devastating penalties allowed.

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