Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of virtual currency transactions.
- Convertible virtual currency is subject to tax by the IRS
- Bitcoin used to pay for goods and services taxed as income
- Bitcoin held as capital assets is taxed as property
• If you are an employer and pay employees using Bitcoin, you are required to report employee earnings to the IRS on W-2 forms, using the U.S. dollar value of each Bitcoin payment on the date it was made.
• If you are an employee, you report your total W-2 wages in U.S. dollars, even if some or all of your wages were paid with Bitcoin.
• If you are self-employed and receive payment with Bitcoin, you are required to report all income in U.S. dollars, using the U.S. dollar value of each Bitcoin payment on the date it was received.
• If you “mine” Bitcoin, you’ll report the gross value of these earnings as income on your taxes, based on the U.S. dollar value of the virtual currency on the day the payment was received.
Convertible virtual currency is subject to tax by the IRS
Bitcoin is the most widely circulated digital currency or e-currency as of 2023. It's called a convertible virtual currency because it has an equivalent value in real currency. The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications. The IRS answered some common questions about the tax treatment of virtual currency transactions in its recent IRS Revenue Ruling 2019-24 and its Frequently Asked Questions article. Tax treatment depends on how a virtual currency is held and used. Below are some tips using Bitcoin as an example:
Bitcoin used to pay for goods and services taxed as income
If you are an employer paying with Bitcoin, you are required to report employee earnings to the IRS on W-2 forms.
- You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
- Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
Employees are required to report their total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin received as income also must convert the virtual currency to dollars as of the day received, and report the figures on their tax returns.
TurboTax Tip: When you hold Bitcoin, it is treated as property for tax purposes. As with stocks or bonds, any gain or loss from the sale or exchange of your Bitcoin assets is treated as a capital gain or loss for tax purposes.
Bitcoin held as capital assets is taxed as property
When you hold Bitcoin it is treated as a capital asset, and you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is treated as a capital gain or loss for tax purposes.
Bitcoin miners are required to report receipt of the virtual currency as income
Some people "mine" Bitcoin by using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.
According to the IRS, when a taxpayer successfully “mines” Bitcoin and has earnings from that activity whether in the form of Bitcoin or any other form, they have to include it in gross income after determining the fair market dollar value of the virtual currency as of the day it is received. If a bitcoin miner is self-employed, gross earnings minus allowable tax deductions are also subject to the self-employment tax.
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