With the transition of software from physical, boxed merchandise to web-based, downloadable content, the question of how and whether to tax this less tangible manifestation of goods and services has been taken up by courts and legislators alike. In “The Evolution of Software as a Service Taxes Post-Wayfair,” colleagues Marc A. Simonetti, Dmitrii Gabrielov and William L. Bennett examine the evolution of tax laws regarding Software as a Service (SaaS) in the wake of the U.S. Supreme Court’s South Dakota v. Wayfair Inc. decision.
The IRS has issued its first major ruling on the U.S.
federal tax implications of transactions in, or transactions that use, Bitcoin and other convertible virtual currencies.
The ruling stresses that it relates to convertible virtual currencies. The legal landscape with respect to Bitcoin and other convertible virtual currency continues to evolve at a more rapid pace. Last March, FinCEN issued its now famous virtual currency guidance. Shortly thereafter, a number of high profile enforcements ensued. If history is any lesson, it is likely that following this ruling will likely will be followed by some tax enforcements. Therefore, miners, exchanges, businesses transacting in Bitcoin and others dealing with virtual currencies should promptly assess this guidance and ensure compliance.The IRS made clear that penalties apply for failure to timely comply. This should be of particular concern to the extent the ruling is applied retroactively.
Among other things the IRS has stated:
One of the most significant pronouncements of the notice is that the IRS has determined that virtual currency is treated as property for U.S. federal tax purposes and therefore general tax principles that apply to property transactions apply to transactions using virtual currency. The notice indicates that this means that:
- 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. Normally, 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.
Additional points made by the IRS include the following:
- Convertible virtual currency is a virtual currency that has an equivalent value in real currency,
or that acts as a substitute for real currency, such as Bitcoin
- The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
- Virtual currency is NOT treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws.
- For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received.
- The basis of virtual currency received 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.
- For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars using the fair market value of virtual currency as of the date of payment or receipt.
- If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
- A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer and realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset
in the hands of the taxpayer (e.g., inventory and other property held mainly for sale to customers in a trade or business).
- Mining virtual currency triggers gross income at the fair market value of the virtual currency as of the date of receipt.
- If a mining of virtual currency constitutes a trade or business,
and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
- Payments in virtual currency received for services performed as an independent contractor constitute gross income, if related to any trade or business carried on by the individual as other than an employee, at the fair market value (in U.S. dollars) as of the date of receipt and constitutes self-employment income and is subject to the self-employment tax.
- The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
- Payments made using virtual currency is subject to information reporting to the same extent as any other payment made in property (e.g., payments in virtual currency with a value of $600 or more for fixed and determinable income including rent,
salaries, wages, premiums, annuities, and compensation).
- A person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income.
- Third party settlement organizations are required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.
- Taxpayers may be subject to penalties for failure to comply with tax laws (e.g., underpayments attributable to virtual currency transactions such as accuracy-related penalties under section 6662, and failure to timely or correctly report virtual currency transactions when required to do so under section 6721 and 6722).
However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.Conclusion
If you have any questions, Pillsbury has one of the leading virtual currency practices in the country. Our team of over 70 professionals includes a number of tax specialists.