BitcoinsThere has been a lot of talk and guessing around on whether Bitcoin would be treated as currency, property or investment for tax purposes. With only a few weeks to go before the April 15th filing deadline, the IRS has finally made up its mind – virtual currencies, such as Bitcoins, will be taxed as property.

This means that if you have received Bitcoins for your services or products, it has to be reported on either your W-2 as part of your wages (if you are an employee) or with a 1099-MISC form (for independent contractors).

The Bitcoin value must be determined in U.S. dollars based on the fair market value at the day of the transaction or receipt. If the virtual currency listed on an exchange, which is controlled by market supply and demand, the fair market value will be based on converting the applicable virtual currency at the exchange rate that is consistently applied in a reasonable manner.

Should you want to exchange your virtual currency for other property, watch out! If the fair market value of the property you receive for your Bitcoin exceeds your adjusted basis of the currency, it is viewed by the IRS as taxable gain. On a brighter side, if the property value is less that you adjusted basis, then it a loos and might be deductible 9for more information on tax treatment of sales and exchanges see Publication 544).

If you are among those who “mines” Bitcoins and it constitutes a trade or business and you are not an employee; your net earnings from such activity will be considered as self-employment income, and thus subject to the self-employment tax.

What about backup withholdings? Per IRS payment made by Bitcoins, or any virtual currency, are subjects to the same rules as any other payments made in property” payor must backup withhold from the payment made in virtual currency if the payor received a notice form the IRS that backup withholding is required, or if payee failed to provide/ provided incorrect TIN (taxpayer identification number).

If you fail to comply with tax laws, such as underpayments of virtual currency transactions, you may be subject to penalties. If you fail to report have reported incorrectly your virtual currency transactions, you may be subject to information reporting penalties. On the brighter side of things, you can get penalty relief if you can prove that the underpayment of failure to properly file information returns was due to a reasonable cause.

With April 15th deadline closing in, if you have any questions about reporting your Bitcoin income, or need to help filing your taxes, it will be a good time to reach to qualified tax relief attorneys at U.S. Tax Shield. With decades of experience, they are always on the lookout for their clients’ best interest.