Tax Laws and Cryptocurrencies
Virtual Currencies Bring Real Tax Obligations
Cryptocurrencies are on the rise across the United States – and even the world. From Dogecoin’s dream of going “to the moon” to Bitcoin’s unprecedented spike in value since the end of last year, virtual currencies are piquing the interest of a growing number of consumers. With the rising popularity of cryptocurrencies, however, comes a necessity to understand the tax liabilities that accompany them.
What Is Virtual Currency?
Virtual currencies, also known as cryptocurrencies, are digital representations of value. They could be convertible or nonconvertible, with the latter being used solely for recreational purposes, like digital currency earned and spent within a video game. Convertible currencies, however, have an equivalent value in real money and can be used as an investment or in an exchange for goods and services.
Convertible virtual currencies like Bitcoin, Ether, and Ripple can be used in place of standard currencies. Still, though the funds can operate like “real” money such as cash and coins, they boast a few key differences. Cryptocurrencies are distinct from real money because they:
- Are not issued by the government
- Do not have a physical presence
- Do not have legal tender status
- Run on decentralized blockchain networks
Still, this does not disqualify them from tax consequences.
US Laws Governing Cryptocurrencies
In the United States, convertible virtual currencies are treated as property – not money. This categorization subjects crypto deals to the same tax principles that apply to property transactions.
Recording Virtual Currency Transactions for Your Taxes
Individuals must pay taxes on the receipt or use of cryptocurrencies in exchange for goods and services, as well as any capital gains or losses from investments in virtual currencies.
It is important to maintain thorough records of your positions for use on your tax returns. You should be sure to document:
- Fair market value of the currency as of the date it was received in US dollars
Determining Fair Market Value of Virtual Currency
All transactions, including those made with cryptocurrency, must be reported in US dollars. Exchange rates fluctuate with supply and demand. To find the value of the deal, one must calculate the conversion of cryptocurrency to dollars at the time of the transaction.
Cryptocurrency as a Gift
If you’ve received virtual currency as a gift, it is not immediately viewed as income. It is only regarded as income once you sell, exchange, or relinquish the cryptocurrency.
If you have invested in, earned, or used convertible cryptocurrencies, you have a liability to pay taxes on that gained property. Trust one of our tax lawyers to help you accurately account for virtual currencies in your return. Contact Scaringi Law today for more information.