To begin our dive into how the IRS treats cryptocurrencies in regard to assets, income, tax liability, and transferability we first look at how the IRS treats private and public transactions involving them. This will be a quick jaunt into the world of determining tax treatment of crypto received for goods, services, or even regular transfers.
According to the IRS, a virtual [crypto]currency can be used to pay for goods or services and possibly be held for investment:
"Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance—but it does not have legal tender status in any jurisdiction.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies."
These currencies are treated as property, akin to stocks. For federal tax purposes, they follow the general property tax principles. Thankfully, though, they are not viewed as actual currencies with regard to generating a foreign currency gain or loss.
For purposes of recognizing income, the fair market value of the coin at time of receipt is reported as taxable income. The currency is to be measured in U.S. dollars, and the value of the payment received becomes the receiver's basis in the asset.
The treatment of cryptocurrency so far seems rather straightforward, but don't hold your breath on any simplicity. It may get a little bit murkier as we dig deeper into this great and possibly complicated topic.
Until next time.
- Tom
Photo by Marta Branco from Pexels
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