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IRS Guidance Says Bitcoin and Other Virtual Currency Must be Reported on Federal Income Tax Forms

IRS Guidance Says Bitcoin and Other Virtual Currency Must be Reported on Federal Income Tax Forms

Tax filing season is once again upon United States taxpayers. Each year, American citizens and green card holders must report any income they earned in the U.S. and abroad to the Internal Revenue Service. Beginning in 2014, American taxpayers are required to include income earned by way of Bitcoin and other virtual currencies on their federal income taxes. Bitcoin is a digital or virtual form of currency that is stored on your computer and does not rely on a central bank.


According to IRS guidance, convertible virtual currencies should be treated as a capital asset for federal income tax purposes. IRS Notice 2014-21 defines such a currency as one that acts as a substitute for or has an equivalent value in real currency. This means Bitcoin and other digital currencies are now subject to capital gains taxation rules. In general, long term capital gains rates are more favorable to U.S. taxpayers than ordinary income tax rates. In addition, capital gains may be offset by a taxpayer’s losses, and up to $3,000 in such losses may be deducted from a taxpayer’s ordinary income on an annual basis.



Virtual currency that is held for investment purposes is treated like a stock transaction. Due to market fluctuations, however, individuals who buy and sell items utilizing Bitcoin may have more difficulty determining their tax liability as a result of the transaction. Interestingly, a self-employed taxpayer who is paid in digital currency is required to remit traditional self-employment taxes on the income earned. An employer who pays workers using Bitcoin or other virtual currency also faces some tough reporting requirements because the fair market value of the digital currency on the date the worker was paid must be reported on the employee’s W-2. Since virtual currency is not new, IRS guidance states taxpayers who made mistakes related to virtual currency reporting in prior years may request penalty relief.


Every year, U.S. taxpayers who hold one or more offshore financial accounts with at least $10,000 in aggregate assets or who have signature authority over such an account are required to complete a Report of Foreign Bank and Financial Accounts (“FBAR”) in addition to federal income tax forms. At this time, the IRS has stated American taxpayers who earn virtual currency overseas are not required to report the digital income on the FBAR. Despite this, the Agency cautioned that it may consider instituting a virtual currency reporting requirement on the FBAR in the future.


Navigating the nation’s tax laws on your own can be tough. If you have questions about your federal income or other tax obligations, you are advised to discuss your situation with a seasoned tax lawyer as soon as possible. William Hartsock is a certified tax law specialist with more than three decades of experience assisting clients across Southern California with their international income and other taxation matters. For a free consultation with a hardworking IRS attorney, do not hesitate to call Mr. Hartsock at (858) 481-4844 or contact him online today.


Additional Resources:

Don’t Forget Bitcoin At Tax Time, by Kelly Phillips Erb, Forbes



Photo Credit: JessicaGale, MorgueFile

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