Internal Revenue Service today issued Notice 2014-21 providing answers to 16 FAQ’s while dealing with Virtual Currency such as Bitcoins. These FAQ’s explains how the transactions using Bitcoins are treated for Federal tax purposes. In general, Bitcoins are treated as property for U.S. tax purposes and general tax rules for property transactions apply in these cases.
The Notice further states that:
Among other things, this means that:
- 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.