On November 28, 2017, the federal courts ruled that Coinbase, a popular cryptocurrency exchange, must turn over taxpayer records on accounts with $20,000 or more in any one transaction type (buy, sell, send, receive) for any one year during 2013-2015 to the Internal Revenue Service.
The requested records include taxpayer names, identification numbers, birth dates, addresses, records of account activity, and all periodic statements of account or invoices. In addition, since 2015, the IRS has been using a special software, Chainalysis, to trace the movement of Bitcoin addresses through different virtual wallets. In other words, the IRS is making a point to chase down any Bitcoin tax evaders!
According to Notice 2014-21, bitcoins and any virtual currencies are to be treated as property, not as currency. As such, the following rules apply:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported on a W-2, and are subject to federal income tax withholding and payroll taxes
- Taxpayers who “mine” virtual currency must include in gross income the fair market value of the currency on the date it is mined. If the taxpayer is in the trade or business of mining currency and is not considered an employee, then the “mining” income is subject to self-employment taxes.
- Payments made to independent contractors using virtual currency are taxable, and the tax rules for self-employment apply. In addition, a Form 1099 must be issued.