Has the IRS’s treatment of virtual currency changed?
No. The IRS continues to treat virtual currency as property for U.S.
federal tax purposes. However, last year a government watchdog and
this year a group of lawmakers urged the IRS to clarify its virtual
The IRS has described virtual currency as a “digital representation of
value that functions as a medium of exchange, a unit of account, and/or a
store of value.” Virtual currency is sometimes referred to as
“cryptocurrency” or “digital currency.” Virtual currency does not have
legal tender status in the U.S., even though many people use virtual
currency. “Real” currency, such as the U.S. dollar, is defined by the
Treasury Department as "the coin and paper money of the United States or
of any other country designated as legal tender and circulates and is
customarily used and accepted as a medium of exchange in the country of
Virtual currency may have an equivalent value in real currency. This
type of virtual currency is referred to as “convertible” virtual
currency. “Bitcoin” is an example of a convertible virtual currency.
Bitcoin can be digitally traded between users and can be purchased for,
or exchanged into, U.S. dollars and other real or virtual currencies.
The growth in virtual currency has brought tax questions. In 2014, the
IRS announced that virtual currency is treated as property for U.S.
federal tax purposes. General tax principles that apply to property
transactions apply to transactions using virtual currency. The IRS
- Wages paid to employees using virtual currency are taxable to
the employee, must be reported by an employer on a Form W-2, and are
subject to federal income tax withholding and payroll taxes.
using virtual currency made to independent contractors and other
service providers are taxable and self-employment tax rules generally
apply. Normally, payers must issue Form 1099.
- The character of
gain or loss from the sale or exchange of virtual currency depends on
whether the virtual currency is a capital asset in the hands of the
- A payment made using virtual currency is subject to
information reporting to the same extent as any other payment made in
Since the IRS issued guidance in 2014, the agency has been largely
quiet on the subject of virtual currency. The IRS did state, in court
documents filed in a lawsuit this year, that less than 1,000 individual
income tax returns in 2015 reported using a transaction using virtual
Last year, a government watchdog, the Treasury Inspector General for Tax
Administration (TIGTA), recommended that the IRS revisit virtual
currency. TITGA noted the growing use of virtual currency. “However,
some virtual currencies are also popular because the identity of
the parties involved is generally anonymous, leading to a greater
possibility of their use in illegal transactions,” TIGTA cautioned.
In June, several lawmakers asked the IRS to describe the agency’s
virtual currency strategy. The lawmakers also asked the agency what
outreach and education it has done for stakeholders. In their letter,
the lawmakers directed the IRS to reply to their questions. As of the
date this article was prepared, the lawmakers have not released the
If you have any questions about the federal tax treatment of virtual currency, please contact