What is Bitcoin? How is it taxed?

In 2014, nearly every aspect of business is impacted by technology. I think that it is imperative for business owners to stay educated on all aspects. The "if it's not broke, don't fix it" mentality is not one you can have when dealing with the use of technology. This could be in regards to social media, websites, using accounting software, emailing, etc. Another interesting topic to add to the ongoing list is methods of payment.

One topic that has gained more media attention in Wilmington, NC lately is Bitcoin. I saw an article that announced Reed's Jeweler's would be accepting Bitcoin. While Reed's just started accepting Bitcoin as a form of payment, Bitcoin was actually introduced in 2009.

I have to admit, I had heard the word, but I was not very familiar with what it actually was. In reading the article on a local business accepting it as payment, it sparked my curiosity. On the surface, Bitcoin sounds like something  that was made up…. something that you would see on TV. Ironically, my very first introduction to "Bitcoin" was a few months back while watching the popular television show, "The Good Wife". As we all know, television programs have a tendency to embellish, so I did a little research and thought I would share. The reality is, most of us do not know what Bitcoin is.

Here is a quick summary. Bitcoin is the world's "first centralized digital currency". You would install an app that provides you with a "bitcoin wallet". From there, you would purchase the virtual currency on a Bitcoin exchange. You can not only purchase Bitcoins through these exchange markets but also acquire them through a process called mining  where you use computers to solve complex math puzzles. Once you have Bitcoins, it can be used to purchase goods and services where accepted. Unlike the US dollar, Bitcoin has no central bank and regulation. This virtual currency is not insured by the FDIC.  It is strictly based on peer-to-peer technology. Using Bitcoin offers more anonymity than other methods of payment.

What does this mean from a tax perspective? The IRS has acknowledged and specifically addressed "convertible virtual currency". If you receive Bitcoin for payment, you must report it as income. If you successfully mine Bitcoin, you must report it as income. If you are paid in Bitcoin for wages, it will be subject to payroll taxes. You are still responsible for issuing W-2's and 1099's when applicable. You would report the Bitcoin's "Fair Market Value" in US Dollars. To summarize and keeping it simple, you would treat Bitcoin the same way you would report real money.   One way that Bitcoin can be treated a little differently is that given the rapid appreciation and depreciation of Bitcoin, it is subject to gains and losses on those gains or losses as well.

Bitcoin is still relatively new. It is not accepted by all merchants. It is very volatile and continuously being developed. Use caution and judgment when deciding if you want to take part in anything that is new to the market.