When is a currency not taxed like a currency? When it is a virtual currency

What: Virtual currencies are becoming ever more popular both as a means of exchange and as an investment vehicle. A growing number of mainstream businesses are starting to accept virtual currencies. The Internal Revenue Service (IRS) first addressed virtual currencies in 2014 with the Notice 2014-21. Although the IRS has provided additional guidance since that time, its basic position has not changed. The IRS views virtual currencies as just another type of property, not as a currency, and transactions involving virtual currency are taxed accordingly.

Why: The IRS appears to have made virtual currency an audit priority after reviewing indications that many virtual currency transactions are not being properly reported for tax purposes. This includes adding a question on the tax return about engaging in virtual currency transactions, similar to a question on tax returns about foreign bank accounts. It is important for taxpayers to understand their tax obligations when engaging in virtual currency transactions.

• Buying property or a service with U.S. dollars is not a taxable transaction to the buyer; it is a taxable transaction if buying property or a service with virtual currency
• Cryptocurrency is a type of virtual currency and Bitcoin is a type of cryptocurrency
• On-chain cryptocurrency is recorded on a distributed ledger
• No tax reporting is required if a taxpayer only purchases virtual currency
• While soft forks do not result in a taxable transaction, hard forks and airdrops may result in a taxable transaction
• Basis in virtual currency is its fair market value when received
• If a taxpayer cannot determine fair market value, they should look to fair market value of property or services transferred in exchange
• If a taxpayer cannot identify the unit of virtual currency being sold or exchanged, they should apply first-in, first-out rules
• Documentation is required to be maintained of receipts, sales, exchanges, or other dispositions of virtual currency and fair market values at significant dates

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the various tax rules with respect to virtual currency transactions.

PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering legal, accounting, or other professional service.

Contact: To arrange interviews with Mark Luscombe and other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.