What is Bitcoin?
Bitcoin often referred to as a “cryptocurrency” since it uses the cryptography protocol, is a purely peer-to-peer version of electronic cash that allows you to make online payments directly from one party to another without going through a financial institution. The Bitcoin creator has never revealed his or her identity. Satoshi Nakamoto is the pseudonym used by the creator, which has communicated only through email.
The value of the Bitcoin is determined by the free market and be acquired in different ways. The most known ways to acquire Bitcoin is through exchanges made in the US or abroad and through mining. There is no central authority, central bank or trusted third party. Currently, the total transaction volume on the Bitcoin network approximates the $100 million USD. Transactions fees are minimal (around three cents per transaction) and payments made directly between parties are irreversible.
There are over 600 different cryptocurrencies and the IRS refer to these as virtual currency. The IRS defines virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. For federal tax purposes, virtual currencies are treated as property and transactions using virtual currency would apply the same general tax principles that apply to property transactions. Virtual currency is not treated as currency, which could generate foreign currency gain or loss for federal income tax purposes.
A taxpayer who receives virtual currency as payment for goods or services must include the fair market value, that is, the US Dollar value of the virtual currency on day of receipt to their gross income. In addition, an individual selling or exchanging Bitcoin could result in a gain or loss on exchanging virtual currency. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer would have a taxable gain. On the other hand, if the fair market value of property received in exchange for virtual currency is less than the adjusted basis of the virtual currency, the taxpayer has a loss.
It is important that individuals, investors and organizations that work or are thinking about working with this type of transactions know how to manage and track their tax liability. Feel free to consult any of our tax advisors if you feel that you or your organization may have an impact on taxes.