Image by Pete Linforth from Pixabay.
“Tax Day,” which normally falls on April 15, has been extended this year to May 17 for most people and to June 15 for Texas residents. Regardless of when you file, make sure to include your virtual currency in your tax return, as those transactions “are taxable by law just like transactions in any other property.”
Definitions
“Virtual currency” is defined by the Internal Revenue Service (IRS) as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” The IRS further states: “In some environments, it operates like ‘real’ currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.”
Cryptocurrency is a form of virtual currency “that uses cryptography to secure transactions that are digitally recorded on a distributed ledger.” Some examples of cryptocurrency include Bitcoin, Ethereum, Litecoin, and Cardano.
Tax Implications
The IRS issued Notice 2014-21 “as guidance for individuals and businesses on the tax treatment of transactions using virtual currencies.” Notice 2014-21 states that “In general, 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.”
For Federal income tax purposes, “virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” The IRS refers people to Publication 544, Sales and Other Dispositions of Assets for more information on “the tax treatment of property transactions.”
Guidance in the notice is presented in the “form of answers to frequently asked questions,” which are more easily accessible and expanded upon on the IRS webpage entitled, “Frequently Asked Questions on Virtual Currency Transactions.” There are 16 frequently asked questions (FAQs) answered by Notice 2014-21, and 46 answered on the IRS FAQs website.