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Are Your Bitcoins Taxable?

If you were really ever in doubt that the government would tax your bitcoins or other virtual currency the answer is yes, the income is taxable. So consider the following:

  • If you get paid in virtual currency you must declare that fact on your tax return, stated as the U.S. dollar equivalent of the fair market value at the time you received the income. If you’re an employee receiving wages in virtual currency, your employer must also withhold FICA and Medicare taxes, report your wages to the IRS, and provide you with a W2 at the end of the year.
  • If you’re an independent contractor, your income will be subject to self-employment tax, and if you received more than $600, you should expect a 1099 at the end of the year – the person or company hiring you is obliged to report the payment to the IRS.
  • If mining virtual currency provides either your main or supplementary source of income, you must declare it just as though you were dealing with currency. Keeping good records is important, as you need to state the fair market value (in U.S. dollars) when you take possession.  Again, your income will be subject to self-employment tax.
  • If you hold virtual currency as a capital asset, you’ll recognize gain or loss on its sale or exchange, just as you would on stocks or bonds. Document the fair market value on the date of receipt for your basis, as well as on the date of sale or exchange.
  • Under current law, virtual currency is not treated as currency that could generate foreign currency gain or loss forU.S.federal tax purposes.

Again, and as is always the case when dealing with your taxes, good documentation helps enormously. So how do you determine the fair market value? Check an exchange on the date you receive your currency to see what rate is offered. We recommend you print and save this information for your (and your CPA’s) records. Be sure the date is reflected on your printout, as well as the amount. The IRS will always want the exchange rate in U.S. dollars, so if you’re comparing rates in another currency, convert that currency to U.S. dollars.

For all your tax and accounting needs—whether hard or virtual currency—Patrick & Robinson CPAs is here for you. Contact us for help: or 904-396-5400.

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