Thinking about writing about Bitcoin, I remembered my maverick of an Economics teacher back in high school in Mumbai, India whose very thick south Indian accent meant we did not know what he was saying more than half the time. He started off the chapter on currency by having everyone in class remain standing till we came up with a definition for “Money”. Thankfully someone said “medium of exchange” real quick!

Although the underlying meaning of currency remains the same, the simple concept of a medium of exchange has undergone several upgrades particularly so with the cryptocurrency or digital payment systems known more commonly as Bitcoin.

Bitcoin started out as recently as 2009, invented by programmer possibly named Satoshi Nakamoto. Transactions with bitcoins can be made without any middlemen, which means-no banks, no transaction fees and anonymity! In addition, bitcoin transactions between countries are easier and less expensive and not subject to regulation (yet).

This virtual currency can be used to buy goods and services where it is accepted. Some buy bitcoins for investment and hold on to it hoping it will rise in value.

Tax Treatment of Cryptocurrency by the Internal Revenue Service: 

A. All virtual currency held as investment is treated as property. Hence all the same rules as selling an asset and capital gains apply to any gains or losses from sale of Bitcoins as well. Hence, if you are holding Bitcoins as investment, calculating gains or losses should not be a problem since the basis, holding period and date of sale should be easily determined.

B. For Bitcoin treated as currency, if one is paid in virtual currency for goods or services provided, its fair market value (as of the day the currency was received) needs to be included in calculating gross income for the year.

C. For those who “mine” virtual currency, its fair market value on the date of receipt is included in gross income for the year.

D. If payments of more than $600 were made using virtual currency to an independent contractor for services performed, the payment needs to be notified to the Internal revenue Service via Form 1099-MISC.

E. Third party settlement organizations are required to aggregate payments made with virtual currency with real currency if (1) the number of transactions settled were more than 200, and (2) the gross amount of payments made exceeded $20,000.

Penalties via code sections § 6721 & 6722 may be levied on those who fail to comply with the above filing requirements. Penalty abatement may be available for those who can demonstrate reasonable cause.

Bitcoin has been in the news in 2017 when it’s value shot up to $3,000 from $13 in the year 2009. Various virtual currencies like Bitcoin saw it’s market cap go to $44 billion, Ethereum’s market cap was $21 billion and Bitcoin cash go up to $12 billion in early August of this year.

More recently, there has been news that a “fork” may take place in the blockchain that stores cryptocurrencies. This spin-off, so to speak, will result in another form of cryptocurrency called “Bitcoin Cash”. There may be more tax consequences for those affected by the spin-off.

The Internal Revenue Service started to investigate one of the virtual currency exchanges, Coinbase, asking for an exhaustive list of details about their customers in December, 2016. It figured that a large part of Bitcoin users were not reporting their income/ capital gains on their tax return. Experts see tax exams from the Internal Revenue Service escalating. If you have traded in or purchased cryptocurrency, report and pay your capital gains taxes via amended tax returns.

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