Tax considerations when it comes to your cryptocurrency

On Behalf of | Nov 17, 2019 | Firm News

When the IRS realized that cryptocurrency was here to stay and provided significant income for those with it, it issued a notice making it taxable property for income tax purposes. That was in 2014 before this virtual currency, which includes cryptocurrency, truly exploded on the scene.

If you have virtual currency and are not sure how to deal with it at tax time, the information below may help. This article cannot explore all of the nuances associated with this type of asset, but it can give you a starting point. More than likely, it would be wise to seek out the assistance of a tax attorney to fully explore all of your questions and tax responsibilities.

Some considerations regarding virtual currency

Below is some of the basic information you may need regarding this type of asset:

  • You will recognize a loss or gain when you sell your virtual currency for actual money.
  • If someone pays you in virtual currency for services rendered, the IRS considers it taxable.
  • Virtual currency counts as self-employment income for independent contractors paid in this manner.
  • Employment income paid in virtual currency creates a taxable event that must be reported at tax time.
  • The value of this capital asset that you must report depends on the fair market value of the virtual currency when earned.
  • If you pay someone in virtual currency for a service, you incur a capital loss or gain.
  • If you exchange virtual currency for some other property, you incur a capital gain or loss.
  • If you received virtual currency as a bona fide gift, it does not trigger a taxable event until you exchange, sell or otherwise dispose of it.
  • You will need to maintain detailed records of your virtual currency and any transactions for tax purposes.

This information only touches the surface of what you may need to know when it comes to dealing with your virtual currency at tax time. The IRS continues to expand its knowledge of and dealings with this type of capital asset. The agency has already sent out letters to thousands of cryptocurrency owners and intends to send out more warning them of not reporting it on their income tax returns.

If you own virtual currency, you would more than likely benefit from discussing your situation with an experienced Connecticut tax attorney to gain an understanding of how the IRS will treat it, among other things. Otherwise, you could receive a different type of communication from the agency — one accusing you of a tax crime.