What are the tax rules around Bitcoin and other digital / virtual currencies?

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  • Virtual currencies are created by “mining,” in which the miner, using powerful computers, authenticates a transaction in the blockchain.
  • Digital currency can be traded on third-party digital trading platforms such as Coinbase, used as payment for goods and services, held for investment, and loaned to others.
  • Virtual currency is treated as property for tax purposes, and transactions involving virtual currency are governed by the general tax principles for property transactions.
  • IMPORTANT – when paid as employee compensation, the fair market value (FMV) of the virtual currency (at the time it is paid) must be included in the employee’s W-2 wages, and the employer must withhold income and employment taxes. Similar rules apply when virtual currency is received as payment for services provided as an independent contractor.
  • Gain or loss may be recognized under the general rules applying to the exchange of capital assets when digital currency is used to pay for goods, or when one type of digital currency is traded for another.
  • Held in a foreign account, virtual currency is likely reportable under FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) and income from it subject to FATCA rules.
  • Virtual currency is treated as property

Summary provided by TheTaxAdvisor.

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