On this last day of our dive into cryptocurrency, we will button up how the IRS treats payments.
Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification
number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required.
See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.
In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a–1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.
See The Third Party Information Reporting Center, for more information on reporting transactions on Form 1099-K.
Finally, taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.
This has been a rather eye-opening journey into how the IRS treats the receipt of cryptocurrency, and how it is treated for the purposes of gain or loss recognition. Payments received in cryptocurrency are treated as property based on the fair market value on the day of receipt. Also, if a company pays its employees in crypto, or an independent contractor is paid in crypto, it is treated as compensation.
So, all in all, the treatment of a cryptocurrency depends on the nature of its receipt. If an individual purchased cryptocurrency, the gain or loss is dependent on the difference between the price of the currency on the day it was bought and the day it was sold. Compensation is treated as compensation, and subject to taxation.
That wraps up our dive into the nuances of how the IRS treats cryptocurrency, and I hope it is as helpful for you as it was for me.
Until next time.
- Tom
To read the full bulletin released by the IRS, which is from where all of this information came, is available here, at https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21