The Internal Revenue Service (IRS) has issued Notice 2014-21 detailing how to report virtual currency on the individual tax return.
For federal tax purposes, virtual currency is to be treated as property. If you receive virtual currency as payment for goods or services, you must include the fair market value of the currency when computing the income amount. The fair market value of the currency is to be determined as of the date of receipt. The transaction is reported on the Schedule D.
If the taxpayer 'mines' virtual currency as a trade or business (not as an employee), you may have two reporting events to consider.
- The income is reported on a Schedule C and is subject to self-employment taxes. The income must be converted to US dollars as of the date of receipt and reported on the Schedule C. Websites such as Coinbase can be used to determine fair market value.
- When the virtual currency is traded for actual currency, the transaction is reported as a capital gain or loss on the return.
If a taxpayer is paid in virtual currency, the fair market value of the currency needs to be reported in US dollars as wages on a W-2 as income. The fair market value of the currency is subject to federal income tax withholding. Federal Insurance Act Contributions (FICA) and Federal Unemployment Tax Act (FUTA) tax must be reported on form W-2 as well.
Payment for goods or services made in virtual currency to a taxpayer that is not considered an employee is subject to the same rules as other independent contractor payments. Payments in excess of $600 (Fair market Value) are reported to the taxpayer on a 1099-Misc form in Box 7. If you did not receive a 1099-Misc for the services, you may still have reportable income. Complete a Schedule C to report the earnings.
The IRS does not allow 1031 Like-Kind exchanges for virtual currency transactions.
For more information, visit the IRS website: