G&G Associates - How Does The IRS Treat CryptoCurrencies

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How Does The IRS Treat CryptoCurrencies

Hotep (Peace) G&G Readers,

With the value of Bitcoins and many other cryptocurrencies flying high in 2017, many investors have looked to take advantage of this trend and own cryptocurrencies.  So, let's look at how your Uncle (IRS) will be treating them.

What is a Cryptocurrency?

Cryptocurrency refers to a decentralized digital currency that employs principles of cryptography (communication that is secure from view of third parties) to ensure security, privacy, and anonymity. Consequently, the value of a cryptocurrency is not set by anyone other than market participants, who engage in the process of buying and selling on an exchange platform.

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Bitcoin has become the leader in shepherding in a wave of cryptocurrencies built on decentralized peer-to-peer network and is the primary standard for cryptocurrencies. The currencies inspired by Bitcoin are collectively called Altcoins and have tried to present themselves as modified or improved versions of Bitcoin.  The five most popular cryptocurrencies are Bitcoins, Ethereum (ETH) & Ethereum Classic, Litecoin, ZCash and Dash.  There are over  1100+ types of cryptocurrencies, so this list can vary over time.

How does the IRS Treat Cryptocurrencies from a Tax Standpoint?

Even though Bitcoin is labeled as a “cryptocurrency”, from a Federal income tax standpoint, Bitcoins and other cryptocurrency are not considered a “currency.”  On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of virtual currencies, such as Bitcoins.  According to the IRS Notice, "Virtual currency is treated as property for U.S. federal tax purposes." The Notice further stated, "General tax principles that apply to property transactions apply to transactions using virtual currency."

In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, as a capital asset, such as stocks or real estate, subject to either short-term (ordinary income tax rates) or long-term capital gains tax rates, if the asset is held greater than twelve months (15% or 20% tax rates based on income).  By treating Bitcoins and other virtual currencies as property (capital asset) and not currency, the IRS is requiring the investor to maintain detailed transaction records (i.e. basis, holding period, etc.) in order to determine the amount of tax from the cryptocurrency transaction(s).

Here’s to Good Health, Wealth and Retirement!

Ankh Uja Snb (Life, Health & Strength)
Asar Maa Ra Gray

G&G Associates
Tax, Financial & Veteran Consultant Services
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LEGAL NOTICE: This work is based on what I’ve learned as a financial researcher and analyst based SEC filings, current events, interviews, investment reports, corporate press releases and what I've learned as a financial consultant. It may contain errors and you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Nothing herein should be considered personalized investment advice.