Item 5: Brace for new work.
You may need to start asking your clients about Bitcoin. New IRS guidance treats Bitcoins and other crypto-currencies not as money, but as property, for tax purposes and applies immediately to all returns. See the full text of Notice 2014-21 (PDF).
Among other things, IRS advised that:
- As an employer, if you pay wages in Bitcoins:
- You must report it on W-2.
- You must ensure income tax withholding
- You must ensure payroll taxes deduction
- If you pay contractors and service providers in Bitcoins, such payments are taxable and self-employment tax rules generally apply
- If you make a payment of $600 or more in a taxable year to an independent contractor for the performance of services, you are required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income.
- Virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. Federal tax purposes. It would imply that the “property valuation” would have to done based on market rates as on the date of receipt of Bitcoins.
- However, if you exchange Bitcoins (valued on date of receipt) for a property that has fair market value more than the Bitcoins value, you will have a taxable gain (and loss if the Bitcoins value is less than fair property value)
- Bitcoins will be treated as capital assets in the hands of the taxpayer and not as inventory or property intended mainly for sale to customers.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
What it means for accountants and tax preparers:
- It appears that virtual currency has started its journey into becoming a legitimate financial asset, so accountants need to begin to understand crypto-currencies.
- Accountants should figure out how much record keeping is needed to substantiate the Bitcoin transactions of clients, and what types of documentation is required for such substantiation.
- While preparing W-2s and 1099-Miscs., accountants must make sure to ask for Bitcoin transaction details and prepare them accordingly.
- Apparently, Bitcoins will not end up in current assets but into fixed assets in the books.
- Most free tax software may not be equipped to account for Bitcoin gains or losses and hence the work will shift to accountants and tax preparers to calculate it manually.