Digital currency is taxable, IRS reminds taxpayers

The U.S. Internal Revenue Service (IRS) has warned taxpayers about incurring penalties should they fail to report their cryptocurrency-related incomes. According to the tax agency, digital currencies are treated as property, which means they are taxable.

In its recent release, the IRS said payments made with cryptocurrency are subject to taxes, which will be levied on profits and losses made from trading in cryptocurrency, and will be known as capital gains tax. Taxpayers have until April 27 to file and pay their dues to the taxman.

Similarly, employee wages made in cryptocurrency will also be subjected to taxes. In relation to payments, any digital currency payments made to independent contractors and service providers must be reported to the agency through Form 1099. Also, wages paid to employees must be reported to the IRS through the W-2 form. The wages are subject to payroll, withholding, and income tax and should be reported by the employer.

The taxman also outlined the penalties for those who would not comply with the law. If found guilty of tax evasion, one will be convicted to a term of five years and fined $250,000, and those guilty of false tax returns will be jailed three years and fined $250,000.

According to IRS 2014 guidance, virtual currency is treated as property, hence the tax levies. Furthermore, general tax principles that apply to property transactions are the same principle applied to cryptocurrency transaction. The IRS guidance also touched on self-employed miners, saying, “Resulting from those activities constitute self-employment income and are subject to the self-employment tax.”

Recently, cryptocurrency exchange Coinbase has introduced a tool to help its cryptocurrency enthusiasts calculate the tax due. Because cryptocurrencies are seen as property by the U.S. government, capital gains taxes will apply to every transaction made using digital coins—from hundreds of thousands of dollars’ worth of investment to even a single $2 purchase.

Kirk Phillips, a tax professional specializing in cryptocurrencies described the process as a “coffee problem,” because “even if you were just buying a cup of coffee in bitcoin you would have to report every sale of bitcoin.”