Businesses all over the world are wising up to advantages of doing business in cryptocurrencies, signaling mass adoption and future support for the cryptocurrency ecosystem. Regulators are brainstorming ways to get the process under control. The IRS made it clear that for the tax purposes, cryptocurrencies are treated as capital assets. US businesses that receive cryptocurrency in exchange for products or services must keep track of the basis of cryptocurrency received. The basis of virtual currency is the fair market value in U.S. dollars at the date of receipt. Below is a list of general guidelines for businesses, employers, employees, and miners.
- A business that receives cryptocurrency as a payment method needs to determine whether to report it using Schedule C or Form 1120, depending on the business structure. Suppose a corporation or small business trades cryptocurrency for US dollars or other assets. This results in capital gains which are subject to taxation according to the business’s tax bracket. The entity then should fill out form 8949, Sales and other Dispositions of Capital Assets, and file Schedule D, which is used to report gains or losses resulted from transactions reported on form 8949. When a business sells its cryptocurrency revenues for greenbacks, the LIFO (Last In — First Out), FIFO (First In — First Out) or average cost methods could be utilized to determine the gain or loss.
- If you are an employer paying wages with, say, Litecoin, when reporting employee earnings to the IRS on W-2 forms, you will have to convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep detailed records. Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
- Employees must report their total wages in dollars, even if paid in Litecoin. Self-employed individuals with Litecoin gains or losses also must convert the virtual currency to dollars as of the day earned, and report the figures on their tax returns.
- Because mining can be considered a business venture tax ramifications must be considered. According to the IRS, when a taxpayer successfully “mines” a cryptocurrency and has earnings from that activity whether in the form of cryptocurrency or any other form, he or she must include it in his/her gross income after determining the fair market dollar value of the virtual currency as of the day received. If a cryptocurrency miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.
Finally, here are some useful Q&A’s I picked out from the Internal Revenue Bulletin: 2014–16
Q: Does virtual currency received by an independent contractor for performing services constitute self-employment income?
A: Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed 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.
Q: Are payments made using virtual currency subject to backup withholding?
A: Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.
Q: Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?
A: Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a–1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.
*Written by Alexey Kassabov, EA.
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