How to Treat Virtual Currency in Your Corporate Taxes

Practice Areas

By Hansa Patel

Virtual currency is becoming more common in the corporate world. For federal tax purposes, virtual currency is treated as property. General tax principles that apply to property transactions also apply to virtual currency transactions.

What is Virtual Currency?

Virtual currency is entirely digital and decentralized. This means it is not managed by any government.

“Convertible” virtual currency can be exchanged for real currency, since it has a true market value. Common types include Bitcoin, Ethereum, and Litecoin.

Increasingly, corporations accept virtual currency as payment for goods or services, or they may hold it as investments.

Virtual Currency as Payment for Goods or Services

Businesses that accept virtual currency as payment for goods or services must include it in their taxable gross income.

This is done by calculating the virtual currency’s fair market value on the date of receipt.

Virtual Currency as Investments

Taxpayers generally have capital gains or losses when they sell or exchange virtual currency. A capital gain or loss is the difference between what the taxpayer originally paid for the virtual currency, and how much money they get for it later.

The type of gain or loss depends on how long the taxpayer held the investment.

Mining Virtual Currency

It is complicated to successfully “mine” virtual currency like Bitcoin. Miners are responsible for solving the encryption on a blockchain, which holds untapped virtual currency. Based on how much an individual’s hardware contributed to solving a blockchain, they receive a payment in virtual currency.

When a taxpayer successfully “mines” virtual currency, they must include the fair market value of the virtual currency on the date of receipt in their gross income.

“Mining” virtual currency is considered a trade or business. These funds are classified as self-employment income. Thus, net earnings from those activities are subject to the self-employment tax.

Self-employment income is generally defined as gross income from operating a trade or business, minus allowable deductions.

Payment of Wages

If companies pay employees wages in virtual currency, these wages are taxable. Taxes are based on the currency’s fair market value at the time employees receive payment.

Applicable taxes for wages paid in virtual currency include:

  • Federal income tax with holding
  • Federal Insurance Contributions Act (FICA) tax
  • Federal Unemployment Tax Act (FUTA) tax

These must be reported on Form W-2.

Conclusion

It is important that companies manage their virtual currency accurately for tax purposes. Contact an experienced CPA to help you properly account for your virtual currency payment, expenses, and income in your 2019 taxes.

Resources

IRS Notice 2014-21