Taxation of Cryptocurrency

As cryptocurrency (such as Bitcoin, Litecoin, Ethereum, and others) continue to gain more and more recognition as a form of currency among traders, investors and even some governments, it is important to be aware of potential tax consequences regarding the trade or ownership of such currency. Below you will find a short summary of various terms and how the United States views the reporting and taxation of  cryptocurrency transactions.

  1. Virtual currency (the term the U.S. uses to describe cryptocurrency) in and of itself does not have “legal tender” status in any jurisdiction.
    1. Legal tender is any official medium of payment recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation.
  1. Virtual currency that has an equivalent value in real currency, or that acts as substitute for real currency, is referred to as convertible virtual currency.
  1. Convertible virtual currency – (Bitcoin included)
    1. In general
      1. Virtual currency is treated as property.
      2. General tax principles apply to property transactions.
    2. Virtual currency is NOT treated as foreign currency.
      1. In the event that said currency originates in a different country and is purchased on a foreign index, normal conversion rates apply.
      2. Though it is not treated as foreign currency, if it is held in a foreign account, it will be subject to foreign asset and account reporting rules under FATCA.
    3. Virtual Currency Received as Payment for Goods or Services. If you were to receive virtual currency in exchange for a service provided or good sold as part of a trade or business:
      1. The fair market value (FMV) of the virtual currency received must be included as ordinary income on the date received.
      2. The FMV reported as income becomes your cost basis in the currency.
    4. Using the currency for purchases. If you were to use virtual currency to purchase an item, you would be required to report income equal to the value of your purchase less your cost basis in the currency used.
      1. Character
        1. Capital gain/loss treatment is applied if the currency is a capital asset in the hands of a taxpayer.
          1. Short Term Gains are subject to your ordinary tax rates.
          2. Long Term Gains are subject to capital gains rates (15% or 20% depending on your level of income)
        2. Mining Virtual Currency
          1. You must realize gross income upon receipt of virtual currency from mining activities.
          2. You must recognize it in gross income at its FMV on date of receipt.
  • As a trade or business
    1. If you mine convertible virtual currency as a profession or earn regular income from the activity, all net earnings are subject to self-employment tax.

If you have any questions regarding the reporting and taxation of cryptocurrency, please reach out to DKC for further clarification.

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