Here’s a Fun Read From the IRS on Crypto Taxes

So here’s a lovely publication from the IRS about the application of crypto in relation to how it is taxed. The original link is available at IRS.gov at the bottom of the article…

It literally makes it clear as mud you have to pay taxes on each and every movement of crypto from receiving it for a payment, to exchanging it for another crypto, even including any short term gains or losses you had in it from the time you put some in an exchange to the time you send it to someone for a payment. Our government knows how to make things so smooth and easy to do. Of course, as always, consult your tax professional, legal counsel, financial advisor, and the pope if you need to before making any financial decisions…

Its a little easier to read in its original posting which is here…

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Notice 2014-21

SECTION 1. PURPOSE

This notice describes how existing general tax principles apply to transactions using

virtual currency. The notice provides this guidance in the form of answers to frequently

asked questions.

SECTION 2. BACKGROUND

The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay

for goods or services, or held for investment. 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. In some environments, it operates like “real” currency — i.e., the coin and paper

money of the United States or of any other country that is designated as legal tender,

circulates, and is customarily used and accepted as a medium of exchange in the

country of issuance — but it 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 a more comprehensive description of convertible virtual

currencies to date, see Financial Crimes Enforcement Network (FinCEN) Guidance on

the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or

Using Virtual Currencies (FIN-2013-G001, March 18, 2013).

SECTION 3. SCOPE

In general, the sale or exchange of convertible virtual currency, or the use of convertible

virtual currency to pay for goods or services in a real-world economy transaction, has

tax consequences that may result in a tax liability. This notice addresses only the U.S.

federal tax consequences of transactions in, or transactions that use, convertible virtual

currency, and the term “virtual currency” as used in Section 4 refers only to convertible

virtual currency. No inference should be drawn with respect to virtual currencies not

described in this notice.

The Treasury Department and the IRS recognize that there may be other questions

regarding the tax consequences of virtual currency not addressed in this notice that

warrant consideration. Therefore, the Treasury Department and the IRS request

comments from the public regarding other types or aspects of virtual currency

transactions that should be addressed in future guidance.

Comments should be addressed to:

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Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2014-21)

Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

or hand delivered Monday through Friday between the hours of 8 A.M. and 4 P.M. to:

Courier’s Desk

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2014-21)

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Alternatively, taxpayers may submit comments electronically via e-mail to the following

address: Notice.Comments@irscounsel.treas.gov. Taxpayers should include “Notice

2014-21” in the subject line. All comments submitted by the public will be available for

public inspection and copying in their entirety.

For purposes of the FAQs in this notice, the taxpayer’s functional currency is assumed

to be the U.S. dollar, the taxpayer is assumed to use the cash receipts and

disbursements method of accounting and the taxpayer is assumed not to be under

common control with any other party to a transaction.

SECTION 4. FREQUENTLY ASKED QUESTIONS

Q-1: How is virtual currency treated for federal tax purposes?

A-1: For federal tax purposes, virtual currency is treated as property. General tax

principles applicable to property transactions apply to transactions using virtual

currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether

a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2: No. Under currently applicable law, virtual currency is not treated as currency that

could generate foreign currency gain or loss for U.S. federal tax purposes.

Q-3: Must a taxpayer who receives virtual currency as payment for goods or

services include in computing gross income the fair market value of the virtual

currency?

A-3: Yes. 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,

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measured in U.S. dollars, as of the date that the virtual currency was received. See

Publication 525, Taxable and Nontaxable Income, for more information on

miscellaneous income from exchanges involving property or services.

Q-4: What is the basis of virtual currency received as payment for goods or

services in Q&A-3?

A-4: The basis of virtual currency that a taxpayer receives as payment for goods or

services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the

date of receipt. See Publication 551, Basis of Assets, for more information on the

computation of basis when property is received for goods or services.

Q-5: How is the fair market value of virtual currency determined?

A-5: For U.S. tax purposes, transactions using virtual currency must be reported in

U.S. dollars. Therefore, 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 (or into another real currency which in turn can be

converted into U.S. dollars) at the exchange rate, in a reasonable manner that is

consistently applied.

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for

other property?

A-6: Yes. 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 has taxable

gain. The taxpayer has a loss if the fair market value of the property received is less

than the adjusted basis of the virtual currency. See Publication 544, Sales and Other

Dispositions of Assets, for information about the tax treatment of sales and exchanges,

such as whether a loss is deductible.

Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of

virtual currency?

A-7: The character of the gain or loss generally depends on whether the virtual

currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes

capital gain or loss on the sale or exchange of virtual currency that is a capital asset in

the hands of the taxpayer. For example, stocks, bonds, and other investment property

are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the

sale or exchange of virtual currency that is not a capital asset in the hands of the

taxpayer. Inventory and other property held mainly for sale to customers in a trade or

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business are examples of property that is not a capital asset. See Publication 544 for

more information about capital assets and the character of gain or loss.

Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer

resources to validate Bitcoin transactions and maintain the public Bitcoin

transaction ledger) realize gross income upon receipt of the virtual currency

resulting from those activities?

A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value

of the virtual currency as of the date of receipt is includible in gross income. See

Publication 525, Taxable and Nontaxable Income, for more information on taxable

income.

Q-9: Is an individual who “mines” virtual currency as a trade or business subject

to self-employment tax on the income derived from those activities?

A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the

“mining” activity is not undertaken by the taxpayer as an employee, the net earnings

from self-employment (generally, gross income derived from carrying on a trade or

business less allowable deductions) resulting from those activities constitute selfemployment income and are subject to the self-employment tax. See Chapter 10 of

Publication 334, Tax Guide for Small Business, for more information on selfemployment tax and Publication 535, Business Expenses, for more information on

determining whether expenses are from a business activity carried on to make a profit.

Q-10: Does virtual currency received by an independent contractor for

performing services constitute self-employment income?

A-10: Yes. Generally, self-employment income includes all gross income derived by

an individual from any trade or business carried on by the individual as other than an

employee. Consequently, the fair market value of virtual currency received for services

performed as an independent contractor, measured in U.S. dollars as of the date of

receipt, constitutes self-employment income and is subject to the self-employment tax.

See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for

Deductions, for information on determining whether an activity is a business or a hobby.

Q-11: Does virtual currency paid by an employer as remuneration for services

constitute wages for employment tax purposes?

A-11: Yes. Generally, the medium in which remuneration for services is paid is

immaterial to the determination of whether the remuneration constitutes wages for

employment tax purposes. Consequently, the fair market value of virtual currency paid

as wages is subject to federal income tax withholding, Federal Insurance Contributions

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Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported

on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s

Tax Guide, for information on the withholding, depositing, reporting, and paying of

employment taxes.

Q-12: Is a payment made using virtual currency subject to information reporting?

A-12: A payment made using virtual currency is subject to information reporting to the

same extent as any other payment made in property. For example, a person who in the

course of a trade or business makes a payment of fixed and determinable income using

virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable

year is required to report the payment to the IRS and to the payee. Examples of

payments of fixed and determinable income include rent, salaries, wages, premiums,

annuities, and compensation.

Q-13: Is a person who in the course of a trade or business makes a payment

using virtual currency worth $600 or more to an independent contractor for

performing services required to file an information return with the IRS?

A-13: Generally, a person who in the course of a trade or business makes a payment

of $600 or more in a taxable year to an independent contractor for the performance of

services is required to report that payment to the IRS and to the payee on Form 1099-

MISC, Miscellaneous Income. Payments of virtual currency required to be reported on

Form 1099-MISC should be reported using the fair market value of the virtual currency

in U.S. dollars as of the date of payment. The payment recipient may have income

even if the recipient does not receive a Form 1099-MISC. See the Instructions to Form

1099-MISC and the General Instructions for Certain Information Returns for more

information. For payments to non-U.S. persons, see Publication 515, Withholding of

Tax on Nonresident Aliens and Foreign Entities.

Q-14: Are payments made using virtual currency subject to backup withholding?

A-14: Payments made using virtual currency are subject to backup withholding to the

same extent as other payments made in property. Therefore, payors making reportable

payments using virtual currency must solicit a taxpayer identification number (TIN) from

the payee. The payor must backup withhold from the payment if a TIN is not obtained

prior to payment or if the payor receives notification from the IRS that backup

withholding is required. See Publication 1281, Backup Withholding for Missing and

Incorrect Name/TINs, for more information.

Q-15: Are there IRS information reporting requirements for a person who settles

payments made in virtual currency on behalf of merchants that accept virtual

currency from their customers?

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A-15: Yes, if certain requirements are met. In general, a third party that contracts with

a substantial number of unrelated merchants to settle payments between the merchants

and their customers is a third party settlement organization (TPSO). A TPSO is

required to report payments made to a merchant on a Form 1099-K, Payment Card and

Third Party Network Transactions, if, for the calendar year, both (1) the number of

transactions settled for the merchant exceeds 200, and (2) the gross amount of

payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and

5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with

virtual currency are aggregated with transactions where the TPSO settles payments

made with real currency to determine the total amounts to be reported in those boxes.

When determining whether the transactions are reportable, the value of the virtual

currency is the fair market value of the virtual currency in U.S. dollars on the date of

payment.

See The Third Party Information Reporting Center, http://www.irs.gov/TaxProfessionals/Third-Party-Reporting-Information-Center, for more information on

reporting transactions on Form 1099-K.

Q-16: Will taxpayers be subject to penalties for having treated a virtual currency

transaction in a manner that is inconsistent with this notice prior to March 25,

2014?

A-16: Taxpayers may be subject to penalties for failure to comply with tax laws. For

example, underpayments attributable to virtual currency transactions may be subject to

penalties, such as accuracy-related penalties under section 6662. In addition, failure to

timely or correctly report virtual currency transactions when required to do so may be

subject to information reporting penalties under section 6721 and 6722. However,

penalty relief may be available to taxpayers and persons required to file an information

return who are able to establish that the underpayment or failure to properly file

information returns is due to reasonable cause.

SECTION 5. DRAFTING INFORMATION

The principal author of this notice is Keith A. Aqui of the Office of Associate Chief

Counsel (Income Tax & Accounting). For further information about income tax issues

addressed in this notice, please contact Mr. Aqui at (202) 317-4718; for further

information about employment tax issues addressed in this notice, please contact Mr.

Neil D. Shepherd at (202) 317- 4774; for further information about information reporting

issues addressed in this notice, please contact Ms. Adrienne E. Griffin at (202) 317-

6845; and for further information regarding foreign currency issues addressed in this

notice, please contact Mr. Raymond J. Stahl at (202) 317- 6938. These are not toll-free

calls.

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