Bitcoins may act like money, but IRS says they aren’t. The IRS yesterday announced how that it will treat Bitcoin “virtual currency” as property, rather than currency, for tax purposes. Notice 2014-21 lays out the IRS treatment of Bitcoin and similar virtual money. Some key points:
- As property, gains and losses on Bitcoin are normally capital gains and losses, unless the taxpayer is a dealer in Bitcoins. That means losses are limited to capital gains plus $3,000 for individuals. This contrasts with currency transactions, which normally generate ordinary income and loss under Section 988.
- Transactions in virtual currency will normally generate gains and losses:
If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
That makes using Bitcoins a hassle for taxpayers who try to follow the law. Everytime you buy something with Bitcoin, you will have a capital gain or loss, depending on fluctuations in the Bitcoin market. Imagine if you had to record a little capital gain or loss based on the currency markets anytime you bought anything with cash. If you use Bitcoins every day you’ll have a horrifying Form 8949 to report all of your gains and losses.
- The basis in virtual currency is its value on date of receipt, if you acquire it in a transaction. That same value is the amount you use to compute income if you are paid in virtual currency
- They point out the obvious: “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Also, payments in virtual currency are subject to information reporting, same as cash.
- Virtual currency “miners” generate ordinary income. If they do it as a trade or business, it’s subject to self-employment tax.
The TaxProf has more; Accounting Today also has coverage. Peter Reilly has Bitcoins Not Tax Fairy Dust – Second Life Still A Tax Haven?, wisely noting that the virtual currency isn’t generated by the Tax Fairy. And TaxGrrrl weighs in with IRS Says Bitcoin, Other Convertible Virtual Currency To Be Taxed Like Stock .
Ashlea Ebeling, Supreme Court Says FICA Tax Due On Severance Pay:
What the Supreme Court decision means for employers is that what had long been the case –severance pay is subject to FICA tax—remains the case. And for employees who are laid off, it means that they will continue to get a little less in “take-home” severance because it’s dinged for their share of FICA tax.
It seemed like a reach to say otherwise, but now it’s not even that.
O. Kay Henderson, Legislators ponder tax credit for student loan payments. A truly awful idea. This credit doesn’t encourage getting higher education; it encourages borrowing to pay for higher education. As an unintended but obvious consequence, it discourages saving to pay for college — there’s no tax credit for foregoing current consumption to pay for college later. It’s stunning that lawmakers actually want to encourage more student debt when many students already are entering a brutal job market with crushing loan obligations.
Joseph Henchman has two posts at Tax Policy Blog that should be read together: Wisconsin Approves Income Tax Reduction, Business Tax Reforms and Who Would Pay a Higher Illinois Income Tax? Not the folks that move to Wisconsin, for sure.
Jason Dinesen, More on the 0.9% Medicare Tax and Iowa Tax Returns
Paul Neiffer, Schedule F Reporting Update:
I got some feedback on my previous post on Tax Reform and low Schedule F reporting of income. Several sources of farm income does not show up on a Schedule F. This includes many common sales of farm assets such as breeding stock and equipment. Most of the expenses associated with this income is deducted on Schedule F, however when these assets are sold, none of the gains appears on Schedule F. Rather, this income is usually reported on Form 4797.
That still doesn’t change the fact that these simple farmers play the cash method like a violin to achieve tax results other businesses can only dream of.
William Perez, Identity Theft and Your Income Taxes
David Brunori, Hang On to Your Wallets (Tax Analysts Blog)
Howard Gleckman, Dave Camp’s Plan for the Expired Tax Provisions: An Almost-Good Idea (TaxVox)
TaxProf, The IRS Scandal, Day 321
Tax Justice Blog, State News Quick Hits: To Cut or Not to Cut?
The modern American fiscal state is predicated on a bargain. During World War II, lawmakers were forced to expand the personal income tax to help pay for the fighting. Over the course of just a few years, they added millions of middle-class Americans to the tax rolls for the first time, transforming the income tax from a rich man’s burden to a middle-class millstone. In return, however, these same lawmakers offered the middle class an implicit (and sometimes nearly explicit) guarantee — rich people would be asked to pony up, too.
Cool story. Let’s see how that works nowadays:
So now the “rich” aren’t paying their “fair share,” they’re picking up most of the tab. How does it work if you break it down further?
So not only do “the rich” pay their share of the freight, they pay a lot more than their share of earnings. And when you take government benefits into account, the whole “fair share” argument is tough to support:
I don’t buy Joseph’s “social contract” thinking. The whole emphasis on inequality being peddled by the administration is a diversion, an attempt to change the subject from the manifest failures of Obamacare and foreign policy blundering. No matter how hard they hit “the rich,” or how bad doing so is for the overall economy, there is never a point where the politicians will say the rich are being hit enough.
To the extent “inequality” persists, it’s clearly not a direct function of the tax code or government spending. Politicians, though, find it useful to encourage the belief that they can spend on whatever pleases the crowd by just by making the rich pay their “fair share” — as if they weren’t already. It’s the flip side of the widespread belief that the government can just balance the budget by cutting foreign aid. It’s just an attempt to fool the gullible long enough to win another election.
Going Concern, Thrift Shops Issue Specific Guidance on Deduction Amounts for Used Underpants. I didn’t know there was a deduction for toxic waste.
Tags: Anthony Nitti, Ashlea Ebeling, Bitcoin, David Brunori, Going Concern, Howard Gleckman, Janet Novack, Joseph Thorndike, O Kay Henderson, Paul Neiffer, Peter Reilly, Tax Justice Blog, TaxGrrrl, TaxProf, William Perez