Bitcoins - how the IRS views this currency

If your not of the "Millennial" age group or younger, paying with something other than paper dollars, coins or plastic can seem crazy. Even getting comfortable with PayPal and Square may put you off so the thought of Bitcoins becoming a mainstream form of payment may throw you over the edge. But here's the skinny...

Bitcoin: Virtual currency is a type of unregulated, digital money issued and usually controlled by its developers and used among members of a specific virtual community. With the increase in popularity and mainstream acceptance of virtual currency (e.g., Bitcoin), it’s not surprising that the IRS determined that virtual currency is treated as property for U.S. Federal tax purposes. This means the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.

Still in the dark? Click here to learn more about using Bitcoin.

The tricky part is that the exchange of property to pay for an item could result in a capital gains liability. Using Bitcoin to pay for a cup of coffee, in essence, is like paying for that cup of coffee with stocks. The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors. This should be taken into consideration when determining whether or not your business will accept Bitcoin as a form of payment.

This treatment covers past and future transactions and tax returns. The IRS stated that it may offer relief from penalties to taxpayers who engaged in transactions before March 27, 2014, and can show “reasonable cause” for underpayments or failure to file.