According to an article in CNNMoney magazine – “bitcoin is a new currency that was created in 2009 by an unknown person…”
Its value fluctuates and although it is known as virtual currency, the IRS ruled that this digital asset is considered property rather than legal tender. (Read more about the IRS Notices)
Since bitcoin fluctuates in value, what one is able to purchase with one bitcoin will fluctuate. For example, as of this writing the ‘value’ of one bitcoin was 282.21 U.S.dollars. However, the value (or buying power of a bitcoin) differed in other currencies - one bitcoin was valued as 180.57 British Pounds; 272.64 Swiss Francs and 369.26 Canadian dollars for the same time period; therefore it appears to fluctuate with currency valuations.
Where can one use bitcoins? According to some website information, you would be able to use your bitcoin at such diverse companies as large on-line retailers; lingerie stores; pubs; a diner; mobile gaming (of course!); a limousine company; a university program (in Australia); an on-line booking company; on-line newspaper; an office supply store; to donate to a political party; a major computer company; a bookstore and an on-line flower retailer.
Bitcoinage (if there is such a word) has been described as the crypto currency marketplace and transactions in bitcoins have been declared ‘anonymous’. It is a new form of currency that is created and held electronically in your “bitcoin wallet” (a virtual wallet of course).
But what does this have to do with a person’s digital legacy? If you “own” and use bitcoins, the account is secure and without the appropriate information your beneficiaries would not be able to gain access to your bitcoin account (wallet). The virtual currency could be lost to your heirs forever if they did not possess the password to access your “wallet”.
Also, since a bitcoin is considered property, different IRS rules apply, because it is not strictly defined as legal tender. (Read on for some I.R.S. Guidance about virtual currency)
Before you venture into the complex virtual world of bitcoin, you might want to get more information about its implications for your estate.
If you have more information about bitcoin as a digital currency, I would be pleased to hear from you.
Here is some additional reading available from the I.R.S. dealing specifically with virtual currency:
IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply
IR-2014-36, March 25, 2014
WASHINGTON — “The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.
In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.”
With further reference to Notice 2014-36 of the I.R.S. – “The notice provides 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. Among other things, this means that:
•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.
•Payments 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 taxpayer.
•A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.”
If you are not entirely dazzled by the above Notice…In another I.R.S. Notice – “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
In the I.R.S. Question and Answer section: (which attempts to clarify some virtual currency tax issues)
Question: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?
Answer: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
Question: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?
Answer: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.
Refer to the above specific Notices of the I.R.S. to learn more and consult with a knowledgeable tax advisor about virtual currency and its tax treatment in specific circumstances.
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