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Cryptocurrency Taxation

Cryptocurrency: It’s mysterious, it’s volatile and it’s all over the news. At the start of 2017, one Bitcoin—the most well-known cryptocurrency—equaled approximately $800. By the close of that same year, one Bitcoin approached $20,000. Cryptocurrency is so mercurial, in fact, that taxing and regulating bodies are just now starting to take a closer look.

The Internal Revenue Service has issued basic guidance stating that it considers virtual currencies to be property. IRS Notice 2014-21, 2014-16 IRB 938, 03/25/2014, IRC Sec(s). 1001 addresses the sale or exchange of convertible virtual currency and its use in economic transactions. The currency must be included in computing the gross income of each transaction. The amount of such income is the fair market value (“FMV”) of the virtual currency as of the date that the virtual currency was received.  

Public exchanges do have a record of their users and their wallets, but no Form 1099s are being distributed. The IRS has said that anyone who uses virtual currency as a form of payment must issue a 1099 when the gross amount exceeds the reporting thresholds.  

The IRS has recently been looking at individual tax returns for unreported gains from virtual currencies and recently won a court battle when it issued a John Doe summons for all account holders’ information with transactions over $20,000 on Coinbase from 2013 to 2015. Under the Tax Cuts and Jobs Act, the IRS addressed like-kind exchanges limiting the exchange only to real property that is not held primarily for sale. As such, cryptocurrencies can no longer be exchanged for other like-kind property -- so trading one cryptocurrency for another is no longer a tax-free exchange.

If cryptocurrency use increases and becomes more mainstream, regulating bodies are sure to play a greater role. That makes this, one more area to check for tax risk exposure.

Matthew Halpern is a Tax Manager working in various industries such as professional services, information technology, and manufacturing and distribution. He also works with expatriates and foreign individuals with U.S. activity.

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