Despite the wild swings in the virtual currency markets and the recent scandal involving the Mt. Gox exchange’s loss of $400M, Bitcoin continues to hold some value online. As the most popular virtual currency, Bitcoin is becoming increasingly popular with investors looking for risky, (though potentially lucrative) investments and tech aficionados who want to be in on the ground floor of a currency that answers to no government.
This has led to debate and legal questions in recent years about just how legitimate virtual currencies are as legal tender. Though recognized by no official entity, Bitcoins are regularly traded and used for transactions on many parts of the web (and deep web, of course).
The popularity of virtual currencies has also offered consumers a new way to invest or convert their real-world money, causing a bit of confusion when it comes to taxing Bitcoin and other similar products. Now the Internal Revenue Service (IRS) has weighted in on the matter, clarifying how virtual currencies should be listed on tax forms.
The IRS this week issued a notice stating that virtual currencies such as Bitcoin are to be treated as property for U.S. tax purposes, not as legal tender. The agency does acknowledge that Bitcoin operates much like a “real” currency in many places, but cites the fact that it does not hold the distinction of being legal tender in any real-world jurisdiction.
The IRS also outlined a few different outcomes that follow from this decision. Wages paid in virtual currency are taxable to employees; are subject to income tax and payroll tax; and must be disclosed on W-2s. The same applies to payments made to independent contractors. Also, payments made using virtual currencies are subject to the information reporting required of other property transactions.
Governments around the world have begun to take an interest in Bitcoin, as the technology could potentially impact or even threaten real-world currencies in the future. The FBI has taken an interest in Bitcoin almost purely for its link to illegal inter-state sales, an interest which culminated last fall in the shut down of the popular online black market Silk Road. China has taken a hard-line approach to Bitcoin, outright banning its banks from accepting the virtual currency as deposits.
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