Cryptocurrency Tax Implications

You may know cryptocurrency under more common names like BitCoin, which is just one form of digital cash that emerged in 2008. In general, however, cryptocurrency is digital money that exists outside of a central regulating authority, like a bank that tracks balances and expenditures. Because it can be used globally, cryptocurrency is also called Convertible Virtual Currency or CVC. As users buy into these currencies, the market value fluctuates significantly.

What Makes Cryptocurrency Different?
Instead of having balances and debits confirmed by a bank, cryptocurrencies rely on peer-to-peer confirmations of transactions, called blockchains. This digital money is so called because funds are kept through complex codes, called keys. Users who send and receive money do so with the understanding that all transactions are final and irreversible. Moreover, users are anonymous in this network.

Convertible Virtual Currency and Taxes
You might believe that, because BitCoin and other CVCs are anonymous, highly secure, and exist outside of regulatory authorities, you do not have to pay taxes on them. There is some controversy concerning the use of CVCs; however, there’s no reason to assume this currency can escape taxation.

While CVCs may have been a more ambiguous area of income and taxation many years ago, the growing popularity of cryptocurrency has prompted the IRS to create new regulations classifying this virtual money and dictating the way it must be reported. BitCoin and other cryptocurrencies are non-banked money, but the exchange of CVCs for goods and services is trade or barter and is therefore taxable.

In 2014, the IRS officially stated that cryptocurrency is a capital asset, as it is still property, even if it’s intangible. If you own BitCoin or any other form of CVCs, you owe capital gains taxes. In general capital gains tax calculations, profit from selling an item for more than its purchase price is subjection to taxation. At the date of this posting, a single BitCoin is worth over two thousand dollars, with its value trending upward over the past two years. If we assume you can sell your BitCoin for more than its value in the following year, the profit you make from that sale is then taxed.

BitCoin is used and accepted worldwide, offering users many benefits for keeping their wealth in this system. However, you must be careful to report profits from CVCs appropriately. Contact our CPA for more information on remaining compliant in relation to funds kept in virtual currency.