Due to the monumental rise is virtual currency, the IRS has begun looking for ways to tax virtual currency, like Bitcoin, and the taxpayers who are using it. With very few people actually reporting their Bitcoin transactions, the IRS is now using software to try and find these transactions so they can tax and even penalize the taxpayers. In response, a new bipartisan bill has been introduced with the goal of setting guidelines and rules for those who use Bitcoin.
The bill “CryptoCurrency Tax Fairness Act” calls for a tax exemption for all virtual currency transactions under $600. If passed, it will work similar to foreign bank accounts that have less than $10,000 in them, in that those accounts are exempt from FBAR reporting. The CryptoCurrency Act would go even further. The IRS announced Notice 2014-21 that stated that bitcoin and other digital currency is property for tax purposes, not currency. What that means is your gain or your loss from the sale or exchange of that currency is a capital asset in your hands, and every time you buy something, that is considered a trade. Any payment made using virtual currency is subject to Form 1099 reporting and if your wages are paid by virtual currency, that must be reported on your W-2 form and that income can be taxed.
Any payments you make using virtual currency to independent contractors are taxable and you must issue a Form 1099. When filling out the 1099, you can’t enter that you paid someone 1,000 bitcoins. Instead you must transfer that into dollars, and the value of the Bitcoin is assessed at the time of payment, not when you file. So when reporting this, you must go back and look and find out the Bitcoin’s value. It’s important to remember that if the bill is passed, any transaction under $600 would be completely exempt. Until the bill is passed, you should report all income virtual or in dollars on your tax return. If you fail to, you could face penalties from the IRS.
If you aren’t sure which types of income you need to include on your tax return or whether you need to file a 1099 or a W2, Polston Tax can help! Our team of accountants and tax preparers can not only help you prepare and file your taxes, but they can make sure you are getting the most deductions possible. Give us a call at 405-801-2146 or fill out the form below for a free consultation.