Cryptocurrency is defined as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
The debate over Cryptocurrency, also known as virtual currency, began for the purpose of determining if it is ‘virtual’ or ‘real’ currency. As virtual currencies become more widely used, the IRS is issuing more guidance on how to treat transactions involving its use for federal tax purposes. The IRS defines virtual currency as “a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.” The IRS further recognizes that virtual currencies are being exchanged and used in transactions which are equivalent in real currency or acting as a substitute for real currency. Depending on how the virtual currency is used, the transaction may result in a tax liability, or a tax deduction.
Virtual currency transactions can have a variety of tax treatments which may involve property, capital gain or loss, or ordinary income, depending on the nature of the transaction. There are additional considerations of determining value or basis, such as using USD fair market value, or calculating cost basis.
Are you using or considering using virtual currency as an investment, or as currency in the exchange of goods and services?
If you have questions regarding the tax implications of using Cryptocurrency, contact our office for further guidance.