Cryptocurrency Taxation 101

This page is created to provide a basic overview about cryptocurrency taxation. More advanced cryptocurrency related topics such as hard fork, air-drop, business income and/or expenses, gifting, donation, inheritance etc. are out of scope of this page. Please schedule a consultation appointment with us if you have questions about those topics.

So far the only IRS guidance directly related to cryptocurrency taxation is IRS Notice 2014-21. Following is a summary of the key points:

  1. Cryptocurrency (IRS called it virtual currency) is treated as property for tax purposes. It is not treated as currency that could generate foreign currency gain or loss.

  2. A taxpayer who received cryptocurrency as payment for goods or services must include the fair market value, in U.S dollars, of the cryptocurrency as of the date of receipt in computing their gross income, such amount then becomes the basis of the cryptocurrency they received.

  3. A taxpayer needs to recognize taxable gain or loss upon an exchange of cryptocurrency for other property, depending on the fair market value of the cryptocurrency and the fair market value of the property received on the day of exchange. The character of the gain or loss depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. If it’s a capital asset, the taxpayer generally realizes capital gain or loss on the sale or exchange of their cryptocurrency. If it’s not a capital asset, the taxpayer generally realizes ordinary gain or loss. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

  4. The fair market value of cryptocurrency resulted from mining by a taxpayer is includible in the taxpayer’s gross income on the day the taxpayer received the mined cryptocurrency. The net earnings from the taxpayer’s mining activities are subject to self-employment tax if the taxpayer’s mining activity constitutes as a trade or business, and the taxpayer is not acting as an employee nor running the mining business under a corporation.

  5. Cryptocurrency received as compensation for services performed is treated in the same way as fiat currency received for services performed. For example, cryptocurrency received by an independent contractor constitutes self-employment income; cryptocurrency paid by an employer as remuneration for services constitutes wages for employment tax purposes; a payment made using cryptocurrency is subject to information reporting (Form 1099’s) and backup withholding;

 

Stay tuned for more regulations and further guidance from IRS regarding cryptocurrency taxation!