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Category: Taxation
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In Part I of this series, we discussed the IRS guidelines on the taxation of gains and losses associated with convertible virtual currency. In this post, we will focus on the taxation of income--wages, self-employment income and income from the mining of virtual currency.

Virtual currency income

James Howells of the UK began mining Bitcoins in 2009, when the pastime of creating virtual currency by having your computer solve mathematic problems was done exclusively by tech geeks and the value was minimal. A few years later, Howells cleaned house and threw away an old computer with a digital store of 7,500 Bitcoins. In November of 2013, he realized that those Bitcoins were worth $7.5 million. With no backup, the only way of retrieving the Bitcoins was to go through 25,000 cubic meters of waste and earth at the nearby landfill-an obviously hopeless task.

A growing number of taxpayers are now earning in Bitcoins and other convertible virtual currency, and IRS Notice 2014-21 provides guidelines on how this income is treated for income tax purposes. In sum, income in the form of convertible virtual currency is treated no differently than income received in more traditional ways:

Look to the not so distant future:

San Franciscos first Bitcoin Teller Machine (BTM) was just installed this past September at the Workshop Cafe on Montgomery Street. Right in office our building! The BTM allows users to convert their Bitcoins to cash (and get a great cup of coffee in the process). We will be keeping a close eye on how the new tax guidance affects the Bitcoin and other convertible virtual currency markets, and whether Bitcoin will proceed to develop as a form of currency for ordinary transactions. In the meantime, keep track of your virtual currency--and please dont throw it out.

Part III of this series will address reporting requirements for employees, employers, independent contractors, and third party settlement organizations, as well as penalties for noncompliance.