Cryptocurrency and the IRS

Despite the fact that it has been around for approximately a decade, cryptocurrency has been a huge hit over the past couple of years. More and more people are investing money into virtual currency (also known as cryptocurrency) such as Etherium, Ripple, and most well-known, BitCoin. It would be an understatement to say that the value of cryptocurrency has moderately increased. In 2010, a man in Florida spent 100,000 BitCoin on pizza and other trivial items. As of today, the value of one BitCoin is approximately $10,100. You can’t convince me otherwise; there is no pizza on this Earth worth $1.01 billion dollars. The IRS has even taken an approach to how they view cryptocurrency when it comes to tax purposes.

Interestingly enough, cryptocurrency is not viewed as currency but as property. Whenever a taxpayer acquires cryptocurrency, the basis of the cryptocurrency is the fair market value of the cryptocurrency when the transaction occurs. Cryptocurrency can be acquired via an exchange, similar to the stock markets or via a method that is called “mining”.

If the cryptocurrency is listed for trade, then its fair market value is found by converting the cryptocurrency into USD at the listed rate on the exchange. If the exchange rate is not published on an exchange, the taxpayer must calculate the fair market value himself based upon the average cryptocurrency value on the day the taxpayer acquires the currency. But the IRS has a different method to evaluating cryptocurrency that is obtaining from “mining”.

In that scenario, the basis is determined by the fair market value of the cryptocurrency on the day that it is “mined”. However, it is important to notice that the IRS believes that if any cryptocurrency is “mined” to be used in trade or business, then any income derived from said cryptocurrency is viewed as self-employment income. But on the flip side, any expenses incurred as a result of the “mining” could be deducted as an ordinary business expense. Keep in mind that regardless of how cryptocurrency is obtained, all gains must be disclosed as “gross income” on your tax return.