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There continues to be a lot of confusion around how virtual currency is treated for federal income tax purposes. The IRS treats virtual currency as property. It is treated like any other property. Therefore all of the following are true:
- If you purchase virtual currency with fiat currency this is not a taxable transaction. Your basis in the property will be the price you paid for the currency in US dollars (or converted to US dollars on the day of the transaction at market prices).
- If you mine a virtual currency you have self-employment income determined by the fair market value of the currency on the day it was mined.
- If you receive virtual currency as payment for work done as an independent contractor you have self-employment income equal to the fair market value of the currency on the day you received it.
- If you are a business paying more than $600 worth of virtual currency to a contractor in a year you most file the appropriate information return.
- If you are paid as an employee with virtual currency you have employee income. The amount must be reflected on your W2 and your employer is responsible for withholding and paying appropriate employment taxes.
There are dozens of more cases we can go through, but the net result is being paid in virtual currency is no different than being paid by any other means. It is also important to note that when you convert your virtual currency to fiat currency you will have a taxable gain or loss based on the basis you had in the currency regardless of how it was received.
Please contact us if you need help correcting your prior year returns or planning for the current and future years. We can help you plan to minimize your taxes and remaining compliant with tax laws. We are able to work with clients nationwide. As always you can call us at (972) 521-7800 or use our contact form.
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