Virtual currency is a relatively new phenomenon that users are still learning the rules for. One agency that has already taken a strong interest and developed its own rules for digital assets is the Internal Revenue Services. The IRS reminds users of cryptocurrency and digital assets that profits received through these methods are taxable, just as any other traditional transaction.

In certain situations, digital assets can operate the same as traditional coin and paper currency recognized by the U.S. and other governments. While they don’t have legal tender status in the United States, traders might accept them as consideration in various transactions on the open market.

Cryptocurrency, meanwhile, is a digital asset that uses cryptography or encryption algorithms to secure transactions. Cryptocurrency transactions can be recorded on a digital ledger (a blockchain, for example) that operates as a virtual accounting system. Some popular examples of cryptocurrency include Bitcoin and Ethereum.

The IRS views digital assets with any equivalent value in real currency as a “convertible virtual currency”. This means that any digital trade that can be later converted to U.S. dollars, Euros, or other standard currencies must be accounted for and identified for tax purposes.

Digital transactions that can have tax consequences include:

  • Selling a digital asset
  • Trading or exchanging one digital asset for another
  • Exchanging a digital asset for property
  • Exchanging a digital asset for goods or services
  • Receiving a digital asset for free (subjecting it to a gift tax under IRS rules)
  • Any disposition of a financial interest in a digital asset

Failure to report gains and losses through these transactions can subject taxpayers to increased scrutiny, audits, or even penalties under the IRS code. Through IRS Notice 2014-21, the agency provides users of virtual currency with important guidance on how to view virtual transactions.

The IRS wants taxpayers to know, for example, that:

  • Virtual currency is treated the same as property for tax purposes. General tax principles that apply to property transactions apply to virtual currency transactions as well.
  • If you accept virtual currency as payment for goods or services, you must include the fair market value of the virtual currency (measured in U.S. dollars) when computing gross income. Taxpayers also need to include the dates that digital currencies were received so the market value can be determined accurately.
  • If the fair market value of property received in exchange for virtual currency is greater than the adjusted basis of the virtual currency, the recipient has a taxable gain on the transaction. Likewise, they have a loss if the fair market value received is less than the adjusted basis of the digital currency.

The Tampa Criminal Defense Attorneys at Trombley & Hanes Are Here to Help If You Want to Know More about Virtual Currency and Tax Implications

Virtual currency has exploded from a niche product for tech-savvy users to a common investment for everyday individuals. Regardless of your familiarity with digital currency, it helps to learn more about the potential tax implications so you can avoid issues with the IRS. At Trombley & Hanes, our Tampa criminal lawyers are always available to go through your concerns and make sure your digital investment strategy won’t lead to tax headaches or legal issues down the road. To learn more, call our office today at 813-229-7918, or visit our team online.

Source:

oswego.edu/cts/basics-about-cryptocurrency