We have written before concerning the IRS position on virtual currency, like Bitcoins. In Notice 2014-21, the IRS adds information.
The IRS is aware that virtual currency is used to pay for goods or services, and can be held for investment. This digital data is considered to be a convertible virtual currency because it can be exchanged for, or into, various international currencies.
The sale or exchange of virtual currency, or use of currency to pay for goods or services, has tax consequences which may result in income tax. Virtual currency is treated as property for tax purposes, and the sale or exchange of property may be taxable. Virtual currency does not fall into the classification of foreign currency, and does not have the benefits of IRC §1256 straddles. A taxpayer who receives payment for goods or services in virtual currency must provide for a fair-market-value calculation and record an appropriate amount of income.
Are you required to provide a 1099 to individuals you pay in virtual currency?
Generally, yes. Payments are subject to the same requirements as cash, and should be reported using the fair market value as of the date of the payment.
Are payments subject to backup withholding?
Yes, to the same extent that a cash payment would be subject to withholding. The recipient must provide a social security number and identifying information prior to payment.
For more answers to questions regarding virtual currency, please read the notice by clicking here.