2017 wrapped up as a landmark year for bitcoin and other virtual currencies (also referred to as cryptocurrencies, altcoins, or digital currencies), with record setting market prices and vast public interest in the new technology. While the general population refers to and often considers Bitcoin, Ethereum, Litecoin, etc., as a type of currency, it is important to realize that the IRS views these virtual currencies as property for federal tax purposes. Below are a few key things to beware of if you have jumped into the virtual currency world or are considering it.
1. Taxable transactions. The most important item to keep in mind when dealing with virtual currencies is that almost every transaction creates a taxable event for federal purposes. The tax treatment of the transaction will also vary based on the nature of the transaction itself. The most common virtual currency transactions and tax implications are summarized below.
|
Transaction |
Tax Treatment |
|
Trading or exchanging one virtual currency for another |
Capital gain or loss |
|
Receiving virtual currencies as payment |
Ordinary income |
|
Mining virtual currencies |
Ordinary income |
|
Trading or exchanging virtual currencies for U.S dollars or another legal tender |
Capital gain or loss |
With the IRS treating the virtual currencies as property, an action as simple as buying your morning coffee could generate a capital gain or loss that needs to be reported. For example, imagine you purchased a partial Litecoin for two dollars in early 2016, and bought coffee using that partial Litecoin for five dollars in December 2017. The three dollars of appreciation is considered long term capital gain that needs to be reported.
To mitigate the tax burden, virtual currency users can hold the coins for longer than a year to receive long term capital gain treatment, or even donate the virtual currencies to a charity that accepts them.
2. Records. If you have traded or purchased regulated securities, you are familiar with receiving a 1099 from the broker or investment house that provides the necessary information for tax purposes. This information often includes sale proceeds, cost basis, dates held, and the resulting gain or loss resulting from that transaction. Virtual currency exchanges, however, do not have those same reporting regulations. It falls on the owner to keep accurate records of all the virtual currencies owned and the related transactions, and then to report the taxable events to the IRS. In light of this self-service record-keeping requirement, the most important information to record is the date of purchase, sale, receipt or exchange of the currency and its value in U.S. dollars on that date.
With increased popularity of the currencies and probable increased IRS scrutiny, several exchanges and virtual currency websites are offering databases that aide users in keeping track of their virtual currency portfolio. Several popular platforms are Cryptocompare Portfolio, CoinTracking, and Blockfolio.
Last year was an exciting year on the virtual currency front, and 2018 looks to be following the same pattern. If you are interested in virtual currencies or have any additional questions, please do not hesitate to contact us. Give us a call at 210.733.6611 or email us at office@atkgcpa.com.
By: Kalyn Carroll, CPA
