Reporting of Income and Payment made via Virtual Currency

Reporting of Income and Payment made via Virtual Currency

Reporting of Income and Payment made via Virtual Currency

Reporting of income and payment. In the current year, virtual currency has taken the entire world by storm. At the current times, they look like ever appreciating assets but with profound risks involved. If you have been even remotely aware of the proceedings, you would have heard of Bitcoin and its spectacular rise. Though it is one of the very first and famous ones, there are several others as well.

It is only but natural to worry about taxation when it comes to virtual currency. Sure, they are decentralized and do not necessarily depend on the economy of countries. But when you are part of a system and are trading with virtual currencies, you are liable to pay taxes. The IRS understands that these virtual currencies can either be used to buy goods or services or can also be held as an investment like other instruments. Thus depending on the type you choose, the tax implications of virtual currencies change accordingly.

At the Receiving End

Even though the law at this point does not consider virtual currencies as a currency, you must report if you receive any. You could receive virtual currency in return for the goods or services that you provide to someone. If you are an employee, your employer might also provide you with virtual currencies as remuneration. But irrespective of the source, you need to add the same to your gross income, and normal tax laws will be applicable.

What is important here though is to figure out the fair dollar price and add the same to your gross income. And the fair value must be calculated for the day, the payment was received on. One might argue as to what is the basis for adding the same to gross income. In simple words, you received something that has a fair dollar value and as per the Basis of Assets, it is taxable.

How to figure out fair dollar value?

It is up to the individual to figure out the fair dollar value of the virtual currency on that specific date. If the virtual currency is listed on any of the exchanges, the price of the same is decided based on demand and supply. Thus, depending on the exchange rate the valuation of virtual currency is converted into dollars and the same must be reported in your earnings.

Other modes

You can obtain virtual currencies apart from gaining them in exchange for goods and services or remuneration. Almost all the virtual currencies work with the underlying principle of mining. Mining is a process where you receive virtual currency for solving complex algorithms using computing powers. The same also holds well if you keep a track of all transactions and maintain a ledger. Though the mechanism might differ, the central idea remains the same. Getting  paid in virtual currency on the completion of certain tasks.

If you are an employee and are mining virtual currencies, the same must go into your gross income. The process of figuring out the fair dollar value for the specific day holds good here as well. If you are self-employed, the earnings are also subject to self-employment taxes. Some individual’s or rather independent contractors also engage themselves in mining in exchange for virtual currencies. Self-employment taxes are applicable to them as well. If the same is carried out with the intent of trading or any business-related activity and an employee is not involved.

Virtual currencies, even though quite new to the circuit, already have made their ways into the tax system. If you wish to trade in any virtual currency, it is prudent to be aware of the taxes and take the necessary steps.

Bitcoin Mining as Business? Know its Tax Implications.

Bitcoin Mining as Business? Know its Tax Implications.

Bitcoin Mining as Business? Know its Tax Implications

Bitcoin Mining as Business.Slowly yet steadily virtual currencies are making their way into our lives. It has garnered a lot of interest amongst investors. While some feel that virtual or crypto currency is the future of money, others believe these are good investment instruments.

You must be naïve to think these do not come with inherent risks, but that’s what makes them potential game changers as well. Take the most famous ones, for example, Bitcoin, Ethereum, and Litecoin. The valuation of these three virtual currencies has gone up several times through the year 2017. The likes of Litecoin has gone up by 75 times this year alone.

A lot of us are not very clear on how to get our hands on these virtual currencies should we want to. Well, there are two primary ways in which you can do so. Firstly, you can reach out to one of the exchanges, Coin base for an example, and set up an account with them. You can then link different modes of payment such as credit or debit card or wire transfer. The exchange would then hand over the virtual currency to your account.

The second way of acquiring virtual currencies is to mine them. Mining is a process by which you solve complex algorithms, usually known as Blocks. In exchange for solving these algorithms, you receive a certain quantity of virtual currencies. Well, you do not have to literally sit down and solve equations, you can use computing resources to do the same. Once you make enough of these virtual currencies, you can sell them at their exchanges in return for real currency. And that is how you make money.

Is bitcoin mining treated as Business?

If the mining done by a taxpayer comprises of any trading or business entities and are not undertaken by someone who is employed, then the same qualifies as a business unit. All the earnings from mining, in this case, would then qualify for the self-employment taxes. All the earnings from self-employment, which is usually the net earning minus the deductions, is liable for taxes.

Thus, all earnings from virtual currency must be added to your total income.

It is crucial to note that earnings in the form of virtual currency must be converted to the fair dollar value for that specific day and added to your income.

Self-employment taxes are also applicable if you carry out mining individually as a contractor.

As a rule, any income that is an outcome of trades or business carried out by an individual unless he or she is an employee qualifies as self-employment taxes. So even if you are an independent contractor who does mining and receives virtual currencies, you are liable to pay taxes.

Capital Gain

Investors are slowly mustering the courage to invest in virtual currencies for the long term. If you hold on to your virtual currencies for the long term, they will be treated as other capital assets. Assets such as stocks, real estate, bonds etc. attract capital tax gain or loss. Virtual currencies are also subject to capital tax, should you want to hold on to them for a long term horizon as the IRS considers them as property.

Virtual currencies are also subject to employment taxes if your employer pays you in virtual currency as remuneration. The same rule is applicable here as well, wherein the fair dollar value of the respective virtual currency is taken into consideration.

Since the laws on virtual currency system are in its nascent stages, chances of amendments to the law are high. It is recommended to keep a close eye on the taxation of virtual currency.

Check out more about Taxing in Virtual Currency.

Is Virtual Currency Taxable???

Is Virtual Currency Taxable???

Is Virtual Currency Taxable???

Virtual Currency ,If you haven’t heard of the phenomenal rise of the crypto currency Bitcoin, then you are missing out on something. Right from its mysterious founder(s) to its astounding growth this year, Bitcoin is intriguing, to say the least.One of the prime reasons as to why it is attracting more investors by the day is that you can convert the virtual currency into real money.

Yes, you can purchase Bitcoin or any other virtual currency and trade them for good old real money. This type of transaction allows you to book profit should there be a rise in the price of the virtual currency. But that also attracts the attention of IRS and we will discuss how to address those. Depending on your involvement with virtual currency, the tax implications change.

Goods and Services

Though the number of vendors supporting Bitcoin is not something to brag about, you will still find plenty of them. If you purchase any goods or services with the help of Bitcoin or any other virtual currency for that matter it must reflect in your W2 Form. Here is what you need to do.

  • Convert the equivalent of virtual currency on the day of purchase and keep a note of the same.
  • If your employer pays you in virtual currency, they are subject to same taxes as wages in dollars.

It is important to declare the income in dollars in your W2 Form, irrespective of which virtual currency you dealt with. Self-employed individuals must include the same in their tax returns.


Though most virtual currencies are still in their nascent forms, quite a few of the investors are taking them are serious investments. They believe that the money invested in virtual currency will yield them great returns in the future; which have proven to be correct in the case of Bitcoin as of now. Should you plan to do the same, they would fall under the same category as your normal stocks, capital assets and bonds do. You are liable to pay capital gain or loss tax on your virtual currency in such a scenario.


As of now, there are two ways by which you can get your hands on the virtual currencies. First is the good old method where you buy the virtual currency using real currency. The second method is called mining. The later uses computing power to validate the transactions and keep a track of all transactions. Essentially becoming a part of the block chain.

Should you plan to mine virtual currencies or have already done so, you are liable to pay taxes as well. The IRS clears it out that if you receive any payment in the form of virtual currency by mining, it must be part of your gross income.

To calculate your liability, you need to find out the fair dollar value of the virtual currency on the day you received the payments. The same must then be added to your gross income and tax calculated on the same. This all holds well if you are an employee. For self-employed individuals, the returns from mining activity must be part of gross income. Standard deductibles are applicable. The same is also subject to self-employment taxes.

If you are someone who deals with virtual currencies or is planning to do so, the above are all the tax liabilities you must keep in your mind. It is also crucial to understand that these tax liabilities hold good for the current time. The IRS might update the same, based on virtual currency and its activities. It is a good idea to regularly check for these tax liabilities.