The term “virtual currency” refers to a digital representation of value not issued by any public authority, but which may be, nonetheless, accepted as a means of payment between persons. It functions as a medium of exchange and/or a store of value although it doesn’t have status as legal tender. Such virtual currency having an equivalent value in real currency is referred to as “convertible” virtual currency. The IRS in Notice 2014–215 (Notice 2014-21 may be accessed at https://www.irs.gov/pub/irs-drop/n-14-21.pdf) describes how existing general tax principles apply to transactions using virtual currency as indicated below.

• Virtual currency is treated as property;
• Virtual currency is not treated as currency;
• Virtual currency as payment requires the recipient to include the fair market value of the virtual currency in U.S. dollars when computing gross income;
• Virtual currency basis is its fair market value in U.S. dollars as of the date of receipt;
• Gain or loss on exchange of virtual currency is considered a capital gain or capital loss;
• Type of gain or loss realized generally depends on whether or not the virtual currency is a capital asset in the hands of the taxpayer;
• Mining virtual currency results in realized gross income for tax purposes upon receipt of the virtual currency to the extent of its fair market value as of the date of receipt;
• Virtual currency mining as a trade or business, if not undertaken as an employee results in net earnings from self-employment and constitutes self-employment income subject to the self-employment tax;
• Virtual currency received by independent contractors for performing services, measured in U.S. dollars as of the date of receipt, constitutes self-employment income subject to self-employment tax;
• Virtual currency paid to an employee is subject to federal income tax withholding, FICA tax and FUTA tax based on its fair market value when paid and must be reported on Form W-2, Wage and Tax Statement;
• Information reporting of virtual currency payments requires a person who, in the course of a trade or business, makes a payment of fixed and determinable income using virtual currency with a value of more than $600 to a U.S. nonexempt recipient in a taxable year must report the payment to the IRS and to the payee;
• Information reporting of virtual currency payments to independent contractors generally requires a person who, in the course of a trade or business, makes a virtual currency payment of $600 or more in a taxable year to an independent contractor for the performance of services must report the fair market value in U.S. dollars on the date made of the payment to the IRS and to the payee on Form 1099–NEC, Nonemployee Compensation;
• Virtual currency payments are subject to backup withholding to the same extent as other payments made in property;
• Third-party settlement organizations (TPSOs) must report payments made to a merchant on form 1099-k if the gross amount of payments made to the merchant in 2025 exceeds $2,500, regardless of the number of transactions; and
• Incorrect tax treatment of virtual currency transactions will subject a taxpayer to penalties for failure to comply with tax laws.

IRS Notice 2023-346 modifies previous IRS Notice 2014-21 by revising a sentence in the Background section to remove the statement that virtual currency does not have legal tender status in any jurisdiction.

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Antonio Rodriguez – US Tax Consultants – Tel. +34 915 194 392