Wolters Kluwer looks at tax issues surrounding virtual currencies
Virtual currencies are becoming ever more popular both as a means of exchange and as an investment vehicle. A growing number of mainstream businesses are starting to accept virtual currencies. The Internal Revenue Service (IRS) first addressed virtual currencies in 2014 with the Notice 2014-21. Although the IRS has provided additional guidance since that time, its basic position has not changed. The IRS views virtual currencies as just another type of property, not as a currency, and transactions involving virtual currency are taxed accordingly.
IRS appears to have made virtual currency an audit priority
The IRS appears to have made virtual currency an audit priority after reviewing indications that many virtual currency transactions are not being properly reported for tax purposes. This includes adding a question on the tax return about engaging in virtual currency transactions, similar to a question on tax returns about foreign bank accounts. It is important for taxpayers to understand their tax obligations when engaging in virtual currency transactions.
- Buying property or a service with U.S. dollars is not a taxable transaction to the buyer; it is a taxable transaction if buying property or a service with virtual currency
- Cryptocurrency is a type of virtual currency and Bitcoin is a type of cryptocurrency
- On-chain cryptocurrency is recorded on a distributed ledger
- No tax reporting is required if a taxpayer only purchases virtual currency
- While soft forks do not result in a taxable transaction, hard forks and airdrops may result in a taxable transaction
- Basis in virtual currency is its fair market value when received
- If a taxpayer cannot determine fair market value, they should look to fair market value of property or services transferred in exchange
- If a taxpayer cannot identify the unit of virtual currency being sold or exchanged, they should apply first-in, first-out rules
- Documentation is required to be maintained of receipts, sales, exchanges, or other dispositions of virtual currency and fair market values at significant dates
Expert tax analysis on virtual currency
Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the various tax rules with respect to virtual currency transactions.
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To arrange interviews with Mark Luscombe and other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.