Notice 2014-21 - FAQs on federal tax treatment of “virtual currency” 

March 15:  The IRS today released an advance copy of Notice 2014-21 addressing—in a frequently asked question (FAQ) format—the federal tax treatment of “virtual currency.”

Notice 2014-21 [PDF 42 KB] defines “virtual currency” as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some situations, it operates like “real” currency, but lacks legal tender status.


The IRS notice explains that virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency.

Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

Determining the value

FAQs 3 through 5 of Notice 2014-21 focus on determining the valuation of virtual currency.

For instance, FAQ 3 provides that a taxpayer who receives virtual currency as payment for goods or services must—in computing gross income—include the fair market value of the virtual currency.

The basis of virtual currency that a taxpayer receives as payment for goods or services is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. Accordingly, for U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars, and taxpayers need to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt.

Federal tax consequences

Notice 2014-21 addresses only the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency. As the IRS explained, general tax principles that apply to property transactions also apply to transactions using virtual currency, including:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. In general, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Today’s IRS notice states that there may be other questions regarding the tax consequences of virtual currency not addressed, and requests comments regarding other types or aspects of virtual currency transactions that need to be addressed in future guidance.

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