The IRS has issued guidance providing answers to frequently asked questions (FAQ) about virtual currency. Bitcoin is an example of such currency that has been the subject of recent discussion. The FAQ provides basic information on the tax implications of transactions in, or using, virtual currency. In some circumstances, virtual currency operates like actual currency, but it lacks legal tender status in any jurisdiction.
Virtual currency is treated as property for U.S. federal tax purposes and is governed by the same general principles that apply to property transactions generally. For example, wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer of a Form W-2, and are subject to federal income tax withholding. Also, payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply to such payments.
Payers must normally issue Form 1099. Further, 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.
The IRS and the Treasury Department have requested comments relating to other questions regarding the tax consequences of virtual currency not previously addressed. Comments should be addressed to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2014-21), Room 5203, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may be hand-delivered Monday through Friday between 8:00 a.m. and 4:00 p.m. to Courier’s Desk, Internal Revenue Service, Attn: CC:PA:LPD:PPR (Notice 2014-21), 1111 Constitution Avenue NW., Washington, D.C. 20224. Taxpayers may submit comments electronically via email to Notice.Comments@irscounsel.treas.gov. Taxpayers should include "Notice 2014-21" in the subject line.
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