Virtual currencies such as Bitcoin, Ethereum, Litecoin, and Ripple are gaining traction as viable currencies for a wide range of transactions. However, their increasing acceptance by the public also brings increased scrutiny by the IRS for reporting and compliance.
Virtual currency is an intangible electronic asset that is not regulated by any government or authority. IRS guidance defines a virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Bitcoin was one of the first virtual currencies created and it exists on a digital ledger system known as Blockchain.
“Digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
Unlike a traditional national currency such as the U.S. dollar, the value of virtual currencies can fluctuate widely. Taxpayers who conduct transactions using virtual currency may be required to report these transactions on their tax returns. For this reason, it is critical to note the fair market value of the virtual currency at the time of a transaction.
As virtual currencies gain greater acceptance, the IRS is taking note. Taxpayers who invest in virtual currencies should record the dates purchased, dates sold, purchase price, and the proceeds of all their virtual currency transactions.
The IRS guidance on the reporting of virtual currency transactions notes the following:
If you or your business conduct transactions using virtual currency, keep in mind the following guidance:
Failing to report transactions conducted using virtual currency can have severe tax consequences. It is very important to keep a record of transactions with virtual currency as tax implications continue to change over time. Taxpayers are advised to inform their tax professionals of any virtual currency transactions that occurred during the year.
If you have any questions about reporting virtual currency transactions, please contact us
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