A RELATIVELY NEW FEATURE ON THE FINANCIAL LANDSCAPE
Crypto currencies are a relatively new feature on the financial landscape. Because of their novelty, there has been a lot of speculation and, frankly, wishful thinking regarding how the IRS would treat these currency transactions. Many provisions, e.g., “wash sales” and tax lot treatment, have not yet been finalized. But there are some things, as laid out in IRS Notice 2014-21, that we know for certain.
VIRTUAL CURRENCIES ARE PROPERTY
This means that all general tax principles applicable to property transactions also apply to those using cryptocurrency. Furthermore, cryptocurrencies are capital assets meaning that a sale or exchange (trading one currency for dollars or even for another cryptocurrency) is a capital transaction and will result in either a reportable short- or long-term gain or loss. No different than selling or trading more traditional financial assets like stock or bonds. Recordkeeping thus becomes an extremely important requirement for active virtual currency accounts since every trade of say, Bitcoin for Ethereum requires that the price for the coins be marked on the date of exchange and gain/loss realized for the coin surrendered. This can be difficult for newly minted or thinly traded currencies. Investors should have a plan in place for tracking the cost basis of buys/sells/exchanges before and transactions are initiated.
MINING GENERATES ORDINARY TAXABLE INCOME AND COST BASIS
The fair market value of any virtual currencies received is included in gross income and taxable. If the mining activity reaches the level of a business, expenses related to the activity can be deducted from the value of the currencies received. However, this income then becomes self-employment income and subject to additional self-employment taxation. It’s very important to remember that the cost basis of currencies obtained through mining have a cost basis equal to the value of the income included on your tax return. Failure to track this will result in double taxation when the coins are sold.
When in doubt, as always, it’s probably wise to consult a qualified tax professional. We’re happy to have a conversation with you if you have questions. From individual tax preparation to our business tax service, we can handle any and all of your tax and accounting needs. Fill out the form below to setup an appointment.