Does your client have virtual currency such as Bitcoin? They may be responsible to pay taxes on their Bitcoin currency and any transaction through Bitcoin.
Virtual currency, like the increasingly popular Bitcoin, is treated as property on a tax return. According to the IRS, “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
In other words: If your taxpayer uses Bitcoin to purchase goods or services, you will need to report the transaction on their tax return. To do this you will need to determine:
- If there was a gain or a loss on the trade
- If it was short term or long term (short term being less than a year)
You should report this information on the Schedule D, and either Form 8949 or Form 4797.
This also includes if your taxpayer trades virtual currency for virtual currency. Like kind exchanges must still be reported and may still be subject to taxation. Your client will not receive a 1099 for these transactions. They will be responsible to keep up with this information for tax reporting purposes.
Please Note: This is not intended as tax advice.