Cryptocurrencies have seen a surge in their adaptation over the past year. The field, once dominated by early adapter tech enthusiasts, has attracted the business-minded and investment-savvy searching for greener pastures. Bitcoin, the current all-star of cryptocurrencies was invented October 31, 2008 and initially described as a “peer-to-peer electronic cash system.” Shortly after becoming available to the public in 2009, a single Bitcoin could be purchased for $.0054. As of August 2017, Bitcoin’s price is above $3,300. To help put Bitcoin’s growth into context, the $5 your grandmother gave you for your birthday in 2009, that you later spent on Milk Duds at the movies, would have been worth over $3 million in August 2017 had you used that money to buy 925 Bitcoins. Talk about a sweet return on an investment.
Businesses, entrepreneurs, and investors alike have taken notice of the financial opportunity of Bitcoin and cryptocurrencies in general and have adapted their practices to include these payment options as part of their regular operation. In response, the Internal Revenue Service (IRS) has releasedNotice 2014-21 to provide guidance on how existing tax principals apply to transactions using cryptocurrencies.
First, independent contractors who receive Bitcoin or another cryptocurrency as payment for services will be required to report the amount received as part of their self-employment income. Generally, self-employment income is the sum of all gross income of an individual’s trade or business performed by the individual. As such, the fair market value of the amount received for services rendered as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.
Second, employers who pay employees in Bitcoin or another cryptocurrency will be required to comply with traditional employment tax reporting. Generally, the medium and methods used to pay employees is immaterial to the determination of the classification of the wages. Furthermore, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax an shall be reported on Form W-2, Wage and Tax Statement.
Additionally, persons who in the course of a trade or business make payment of $600 or more in cryptocurrencies during a taxable year to an independent contractor for performing services are required to report that payment. This payment shall be reported to both the IRS and the person receiving payment, through Form 1099-MISC, Miscellaneous Income.
Lastly, payments made using cryptocurrency are subject to the same information reporting as any other payment made in property. Generally, a person is required to report payments to the IRS and to the person receiving payment, when the payment was made with fixed and determinable income with a value of $600 or more during the course of a trade or business during a taxable year.
With the rise in value of Bitcoin and other cryptocurrencies, more businesses, entrepreneurs, and investors will look to include these payment options to their business operations. It is important for taxpayers to stay up to date with the regulation and reporting requirements of the cryptocurrencies to ensure compliance with tax policy.
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.