IRS Guidance on Taxing Virtual Currencies — Explained in Clear Language

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New methods of exchanging currency have brought about a variety of exciting investment opportunities — and quite a few headaches for the IRS and taxpayers alike. In an effort to curb tax evasion, the IRS has released Notice 2014-21, which includes basic information about tax reporting requirements for crypto traders. This guidance is valuable, but it’s also highly confusing for the average crypto user. Below, we offer clarification on some of the most significant sources of confusion:

Notice 2014-21: The Basics

Notice 2014-21 aims to clarify how general tax principles apply specifically to virtual currency. Above all else, the notice reminds readers that most transactions involving virtual currencies are taxable. These transactions may include the sale or exchange of crypto— or the use of virtual currency to pay for goods or services. Likewise, mining cryptocurrency constitutes a taxable event, with miners typically subject to self-employment taxes.

Fair Market Value

In addition to defining cryptocurrency as property for taxation purposes, Notice 2014-21 clarifies the role of fair market value in calculating gains and losses — and related tax obligations. When computing gross income, taxpayers should take the fair market value — in U.S. dollars and as of the date received — into account. If the currency is listed on an exchange, the fair market rate can be determined by converting the cryptocurrency into U.S. dollars based on the listed exchange rate. Depending on the fair market value, the taxpayer may see losses or gains upon completing this exchange. Those who mine virtual currencies can include the fair market value of their proceeds as gross income.

Are you still struggling to make sense of how the IRS handles virtual currency? The Highland Tax Group offers valuable insight into this complicated process. Reach out today at 720-398-6088 to learn more about our crypto-related tax services.