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:

  • Wages. Employees paid in virtual currency must pay taxes on their earnings, at the fair market value on the date of payment. This income is subject to federal income tax withholding and payroll taxes. The wages must be reported by the taxpayers employer on Form W-2.
  • Self-Employment Income. Virtual currency received for services performed as an independent contractor are subject to the self-employment tax. This self-employment tax is imposed on the fair market value of the income as of the date of receipt (measured in US dollars). Payers must issue a Form 1099 to the taxpayer for the annual payment of more than six hundred dollars when the payment is incurred as an ordinary and necessary expense of the payors business.
  • Mining Virtual Currency. If a taxpayer generates new Bitcoins or other convertible virtual currency, the fair market value of that virtual currency on the date of receipt is includible in the taxpayers gross income. If the taxpayer mines virtual currency as their trade or business, and the taxpayer is not mining as an employee, the taxpayers gross income from mining (less allowable deductions) is considered self-employment income and is subject to self-employment tax.

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.

Heres an excellent video from Prager University that makes the absurdity of progressive taxation easy to see:

I love videos like this because they bring the viewer back to basics with simple, logical arguments, designed to shift the terms of the debate.  Far too much of our discourse is conducted on terms set by the Left decades ago.  The political imagination of the American electorate is fenced in by convincing them certain ideas must be accepted without question.  In truth, for free people, every idea is open to question, and the good ones should be easy enough to defend in an intellectually satisfying way, across years and generations.

Whats especially intriguing about this criticism of progressive taxation is that it emphasizes the importance of understanding how individuals earn their money.  Yes, its inherent unfair to expect some people to pay more for the same services, but most people swallow their faint qualms about that fundamental unfairness by reasoning that the wealth of richer people is somehow ill-gotten.  Its unfair to take more from them, sure, but its even more unfair, in a cosmic sense, that theyre rolling in dough.  Everyone who supports progressive taxation accepts, either implicitly or eagerly, the premise that some people have less claim on their own property than others, even though they have committed no crime.  

Perhaps sensing that this case is becoming difficult to make as the State takes and controls more of our national wealth, the Left has developed a new argument that wealthier people should pay radically more for the same public services because they have benefited more from those services - they made more of their education, they derive more value from roads, they have more expensive property for the police to protect.  That argument is logically absurd when so many people pay nothing for services they benefit from, and as this video points out, the proportionate gulf between the share paid by low- and high-end taxpayers is so vast that its impossible to construct a formula justifying the disparity based on how much the two extremes have benefited from government services... a great many of which are of little or no benefit to anyone who actually pays taxes.

Also, this video is great about pointing out that what people do to earn their wealth is an important consideration, but progressive taxation almost completely ignores it, judging us solely by reported income, modified by a vast and ever-changing maze of exemptions.  I would add that not only did a lot of wealthy individuals work extremely hard to accumulate that money, especially during the early days of start-up enterprises, but they also accepted risk.  There is no wealth creation without risk, and there are only two ways to infuse the economy with that priceless resource: either people accept risk voluntarily, or they are forced to do so at gunpoint, as the government seizes assets and becomes the primary investor, or the senior partner in every investment.  The latter approach is not capitalism, or consistent with constitutional liberty.

Progressive taxation is regressive economics: the active punishment of hard work, savings, and investment.  Its administration calls for an insanely obtrusive government that monitors every transaction, armed with a confusing body of tax law that makes nearly everyone a criminal, at the discretion of those who bring the charges.  The inevitable result is a government that seizes and spends far too much of our national wealth... to the applause of those who contribute little to the seizure, and benefit greatly from the spending.  Look at the three brothers in this video, and ask yourself where the downward spiral of their progressive relationship is likely to end.  It takes longer with 300 million brothers, but the destination is the same.

Investors have denounced the increasingly difficult business environment in the country, following the persistence of multiple taxation, transportation and ports logistics challenges, budget delays, high energy cost and worsening institutional issues that negatively impact on their margins.

Under the umbrella of the Lagos Chamber of Commerce and Industry (LCCI), the investors, including manufacturers, traders and players in the micro, small and medium enterprises,  unanimously said that access roads to the Apapa and Tin Can port complexes have become an unprecedented nightmare in the last three months, while smuggling, counterfeiting, under invoicing, granting of undeserved waivers, many tax-collecting agencies and imposition of unwarranted taxes have assumed worrying proportions.

Remi Bello, president, LCCI, who spoke on behalf of the investors, said delivery of containers and evacuation of cargo have become a terrifying experience, resulting in systemic traffic gridlock, paralysis of businesses, high demurrages, frequent accidents and risk to bridges and flyovers.

According to Bello, the Nigerian economy is still riddled with unfair competitions, arising from unbridled importation of consumer products, granting of undeserved waivers to individual firms and evasion of import duty payment.

He said the idea of giving revenue targets to government agencies such as the Nigeria Customs Service (NCS) often leads to unfair taxation and burdens on investors.

"Reports reaching us indicate many instances of upward review of values of import in complete disregard to the values of invoices of such imports," said Bello, during the third quarter press conference held in Lagos.

He stressed that the power sector privatisation is yet to yield positive results, as businessmen, especially MSMEs, make huge expenditure on diesel and fuel as well as pay outrageous electricity bills for poor service.

Though there has been marginal progress in World Bank's Ease of Doing Business rating, investors say registration of businesses at the Corporate Affairs Commission (CAC) now takes over one week, rather than the 24 hours earlier promised, say stakeholders. But others attribute it to power sector challenges, which muscle the top-line and bottom-lines of investors.

Jakob Bejer, managing director, Heidelberg Nigeria and honorary Danish counsel in Nigeria, said investors were already bearing huge costs of poor power supply to their firms, wondering how the country could be competitive in an atmosphere where most businesses were run on generators.

"We need to see actions. We talk of substandard imports and inability to compete, but how can we be competitive on diesel generators? Businesses cannot thrive in this kind of environment,'' he said, during the business breakfast meeting organised by the Nigeria-Danish Chamber of Commerce  in Lagos recently.

The investors also said that lending rate has remained on the high side, thereby making it difficult for players in the SMEs to have finance access for business growth. For instance, the average lending rate for manufacturers in 2013 was 20.4 percent, according to the Manufacturers Association of Nigeria (MAN).


Cyprus and Iceland have signed a double taxation agreement based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital, the Finance Ministry said in a statement on Friday.
By signing this agreement both countries aim to strengthen their trade and economic relations.
Updating, maintaining existing and signing new double taxation treaties is part of the drive to enhance and attract foreign investments, as well as of promoting Cyprus as an international business hub, the statement also said.
Cyprus has double taxation treaties with more than 50 countries.