Reporting Requirements for Virtual Currency

As cryptocurrency continues to evolve as a valuable commodity, the IRS has issued guidance on the reporting requirements associated with the acquisition and sale of it.

What is cryptocurrency? 

Cryptocurrency, also known as digital or virtual currency, is a digital asset that is secured by encryption techniques and is able to be distributed across a large number of computers.  Because cryptocurrency is not generally issued by a central authority, it has been able to exist outside the control of the government.

How does the IRS treat cryptocurrency?

Virtual currency is treated as property that has tax consequences that may result in a tax liability.  When selling virtual currency for real currency, a taxpayer must recognize any capital gain or loss on the sale.

How is a gain or loss determined?

Traditional capital gains tax treatment applies; if the virtual currency was owned for less than one year, any gain or loss would be short term.  If the virtual currency was owned for greater than one year, any gain or loss would be recognized as long term.  The holding period begins on the day after the virtual currency is received.  Short term gains are subject to taxation at the taxpayer’s ordinary income tax rate, whereas long term gains are subject to the more favorable capital gains tax rate.  The amount of capital gains tax assessed is dependent upon the taxpayer’s tax bracket; currently, the capital gains tax rates are either 0, 15, or 20 percent.

How do I determine my basis in virtual currency?

  • If you purchased virtual currency with real currency, your basis is the amount you spent to acquire the virtual currency, including fees, commissions, and acquisition costs.
  • If you received virtual currency in the process of selling property, your basis in the virtual currency would be the fair market value of the virtual currency, in US dollars, on the date of receipt.
  • If you received virtual currency in exchange for services rendered or work performed, your basis is the fair market value of the virtual currency, in US dollars, on the date of receipt.
  • If you received virtual currency as a gift, your basis is equal to the donor’s basis or the fair market value of the cryptocurrency at the time you received the gift.

If someone pays me with virtual currency for services I’ve performed, is it taxable?

The answer is yes. Regardless of whether you are an employee or act as an independent contractor, any time you receive payment in the form of cryptocurrency for services rendered or work performed, you must recognize that as ordinary income (which is subject to taxation at your tax bracket) regardless of whether you convert the virtual currency to real currency or not. 

Recordkeeping is key

Since virtual currency is still a relatively new type of asset with very little government oversight, it is critical to keep detailed, specific records associated with its receipt, sale, and exchange.

Familiarize yourself with IRS Notice 2014-21 in order to be aware of all of the situations that trigger a reporting requirement. And, if you have questions, feel free to reach out any time.