How Does Bitcoin Mining Work?

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Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Convertible virtual currency is subject to tax by the IRS Bitcoin is the most widely circulated digital currency or e-currency as of It's called a convertible virtual currency because it has an equivalent value in real currency.

The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications.

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Tax treatment depends on how a virtual currency is held and used. Below are some tips using Bitcoin as an example: Bitcoin used to pay for goods and services taxed as income If you are an employer paying with Bitcoin, you must report employee earnings to the IRS on W-2 forms.

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You must convert the Bitcoin value to U. Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.

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Employees must report their total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin gains or losses from sales transactions also must convert the virtual currency to dollars as of the day received, and report the figures on their tax returns. Bitcoins held as capital assets are taxed as property If Bitcoin is held as a capital asset, you must treat them as property for tax purposes.

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General tax principles applicable bitcoin example of earnings property transactions apply. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

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Bitcoin miners must report receipt of the virtual currency as income Some people "mine" Bitcoin by using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.

If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax. Got investments?

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