Bitcoins – Are they for real?

by | Aug 27, 2014 | International Desk, Marketers IRL, Tax and Accounting Desk

Instead of getting a paycheck, imagine being paid in tokens to use at the arcade, or in “points” to use online. And still be fully taxed. Bitcoin is a bit like that.

As a virtual currency, Bitcoins do not exist physically. It is an entirely electronic exchange.

Virtual currency, according to the IRS, is a digital representation of value used as a medium of exchange. “Convertible” currency has a real currency equivalent and can be exchanged into existing monetary systems (US dollar, Euros, etc).

For tax purposes, the IRS says virtual currency is property. State laws generally require employers to pay employees in cash or the equivalent. In the US, if an employee agrees to be paid in Bitcoins, they must be paid in cash first and then buy Bitcoins from their employer, post tax.

As for independent contractors and Bitcoins, the fair market value for when services were performed, measured in US currency, is considered miscellaneous income; thus contractors paid over $600 cash equivalent are subject to Form 1099 reporting. This means an accounts payable department may be more likely to be dealing in Bitcoins than a payroll department.

The number of businesses accepting Bitcoins for payment is reportedly increasing. In the past couple years, companies such as BitPay, Wagepoint, and BitWage, have offered services as Bitcoin payroll service providers.

Is virtual currency the wave of the future? Probably not as such. But some may argue that with direct deposit and online banking, currency is already virtual.

Click here for more information. One of our Tax Associates, Matt Powalski also wrote a great article, “Bitcoin: A True Phenomenon in Digital Currency” about the tax implications of using Bitcoin, which was published by CPA Trendlines.

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