What should I know about virtual currency transactions?

Here are a few FAQs about virtual currency transactions:

Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See IRS Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

What is the basis of virtual currency received as payment for goods or services?

The basis of virtual currency that a taxpayer receives as payment for goods or services is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See IRS Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.

How is the fair market value of virtual currency determined?

For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Does a taxpayer have to recognize a gain or loss on an exchange of virtual currency for other property?

Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See IRS Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

The character of the gain or loss generally depends on whether the virtual
currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer such as stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer, such as inventory and other property held mainly for sale to customers in a trade or business.  See IRS Publication 544, Sales and Other Dispositions of Assets, for more information about capital assets and the character of gain or loss.

Where can I get more information on the taxability of virtual currency transactions?

See  IRS Notice 2014-21 , Taxation of Virtual Currency

 DISCLAIMER: This information is extracted with permission from IRS releases.  We are not responsible for the application of this general information to the specific circumstances of a reader unless we have been engaged as the reader’s accounting firm.

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Roy & Associates, PC serves clients in western Pennsylvania located predominantly in Westmoreland County, Allegheny County, and Fayette County.

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