The IRS, Bitcoin, and Other Virtual Currencies

The IRS and Bitcoin have become common topics within the Block community. IRS Notice 2014-21 will act as our primary guide for decoding tax law, Bitcoin, and all questions in-between.

Let’s dive into part three of our Bitcoin series addressing IRS-imposed taxes and Bitcoin.

Detangling the IRS and Bitcoin

According to IRS Notice 2014-21, the IRS acknowledges the existence of “virtual currency” used for purchasing goods, services, or investments.

The notice continues stating that:

 Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency – i.e., the coin and paper money of the United States or of any other county that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance – but it does not have legal tender status in any jurisdiction.

In short, the Bitcoin and its rival currencies are each acknowledged as a unit of exchangeable value. This value can be exchanged for common expenses such as food, bills, services, and other exchangeable goods. For sake of establishing value, each unit of Bitcoin is referred to as property.

More from IRS Notice 2014-21:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency.

The IRS briefly mentions Bitcoin as a primary example because its become highly visible and increasingly exchanged for traditional currencies.  The ability to cross traditional lines illustrates how the value is highly driven by the supply-and-demand of foreign exchange.

Common Questions: Bitcoin and the Law

There are frequent questions included in IRS Notice 2014-21. Below, we have addressed variants of these questions from curious investors who gave us a shout via Twitter:

How is Bitcoin taxed?

— Mark A. Angst (@angst01) November 29, 2017

IRS Explanation: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

I’m curious what they’d say if you walked into an @HRBlock and said “I have $xxxxx in Bitcoin — what do I put on my taxes”

— Chris Maddern (@chrismaddern) November 26, 2017

IRS Explanation: A U.S. taxpayer who receives virtual currency as payment for goods or services must, when computing gross income, include the fair market value of the virtual currency measured in US dollars based on the date that the virtual currency was received.

Continuing the Conversation

This concludes part three of our four-part Bitcoin series. Subscribe to the Tax Information Center blog to continue following this story.

For real-time questions surrounding cryptocurrency, Bitcoin, and all virtual investments in-between locate your nearest tax pro to discuss your unique tax perspective.