Bitcoin, Dogecoin, and Ripple—you’ve probably heard of them, they’re some of the most popular cryptocurrencies on the market this year. Many people are beginning to invest in cryptocurrencies, and you will be required to report them on your tax return.
The IRS considers these cryptocurrencies as virtual currency, or a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Notice 2014-21, 2014-16 IRB 938.
These currencies are accepted similarly to “real” currencies, like cash, in some places. Up until May of this year, you could use Bitcoin to purchase a Tesla vehicle. Various platforms have expanded to consider the use and exchange of virtual currencies including Paypal, Amazon, Mastercard, Venmo, and maybe even your local gas station.
The IRS treats virtual currency as property for Federal income tax purposes. This means that the exchange or sale of virtual currencies will likely have tax consequences that may result in liability. The capital gains tax applies when cryptocurrency is used to buy goods and services, or when cryptocurrency is sold. In 2014, the IRS published Notice 2014-21 which offers additional guidance as to how long-standing tax principles relating to property transactions apply to virtual currency.
Recently, the IRS has updated Form 1040, U.S. Individual Income Tax Return to ask whether a taxpayer received, sold, sent, exchanged, or otherwise acquired a financial interest in virtual currency during the tax year. If you answer yes to this question, you will need to file an additional tax form for reporting gains and losses.
If you owned, sold, sent, exchanged, or otherwise acquired a financial interest in a virtual currency, the professionals at The Center are more than knowledgeable, for more information, please contact us at (618) 997-3436.