Pillsbury Winthrop Shaw Pittman

IRS issues significant convertible virtual currency ruling — Bitcoin community abuzz

By James G Gatto

The Internal Revenue Service (IRS) has issued its first major ruling on the US federal tax implications of transactions in, or transactions that use, Bitcoin and other convertible virtual currencies. The ruling stresses that it relates to convertible virtual currencies.

One of the most significant pronouncements of the notice is that the IRS has determined that virtual currency is treated as property for US federal tax purposes, and therefore general tax principles that apply to property transactions apply to transactions using virtual currency. The notice indicates that this means: 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; and payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

In a set of frequently asked questions (FAQs) issued in conjunction with the notice, the IRS also indicated the following…

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