Bitcoin Tax Attorney Atlanta
The IRS has ruled that bitcoins and other convertible virtual currencies are considered property and not treated as currency. Virtual currencies are property for tax purposes, meaning you will have capital gain or loss when disposing of virtual currency. Income is taxable, even if you are paid in virtual currency. Spending virtual currency is really two transactions where one is disposing of the virtual currency and the other is spending the dollar-equivalent amount. Remember that business transactions in bitcoin are subject to all the normal rules for sales tax, withholding, and information reporting.
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Virtual currency does not have legal tender status in any jurisdiction.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
For federal tax purposes, virtual currency is treated as property. General tax principles applicable property transactions apply to transactions using virtual currency. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. Transactions using virtual currency must be reported in U.S. dollars” on the tax return. Taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars – at the exchange rate, in a reasonable manner that is consistently applied.
When bitcoins are disposed exchanged, four things happen: Income is realized from any gains on the property. Gain is measured by the change in the dollar value between the cost basis (the purchase price) and the gross proceeds received from the disposition (the selling price). The tax rates that apply depend on whether the property was held for a short-term or for a long-term duration. And finally, Dispositions of property are reported on the tax return using Schedule D & Form 8949 or Form 4797. These forms require us to “show our math” when calculating gain or loss.
If paying employees in bitcoin, first withhold all applicable payroll tax in US dollars. Net pay can then be paid out in bitcoin as appropriate. Taxes are paid in dollars, not in bitcoin. Converting bitcoins to dollars on a regular is good practice so you do not have to make double entries and records. Sales and expenses are recorded in dollars. Gain or loss on holding bitcoin are recorded as trading gains (Form 4797 or Schedule D as appropriate).
Bitcoin Tax Attorney Atlanta