Taxes and Virtual Currencies

Virtual Currencies

What you need to know

Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe in that world.

The IRS is paying close attention

The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you’ll have to report your transactions in Bitcoins and the like. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you don’t, you just might be!

It’s property, not money

Note that the IRS doesn’t treat Bitcoin or other virtual currencies as money. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it as income based on its fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.

Example: Craig Crypto bought a single Bitcoin on Dec. 29, 2016 for $967. After holding it as an investment (capital asset) for more than a year, Craig sold his Bitcoin for $14,492. He reports and pays 15 percent tax as a capital gain on his profit of $13,525.

Be aware of the risk

In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances.

If you need help with any tax questions related to virtual currency transactions, don’t hesitate to call.