Taxing Cryptocurrencies

Bitcoin, Ethereum, all varieties of these tokens have been in the news quite a bit lately, some of which have reached record high prices. The more proper description of these tokens is a virtual currency or cryptocurrency. However, the similarities stop there. 

Did you know that there is a sea of US based and international cryptocurrencies in the market or soon to be released into the market?  

An emerging question we are fielding from our clients is how are virtual currency transactions taxed? Are there different flavor of cryptocurrencies and are they taxed in different ways? Is there thorough guidance from the Internal Revenue Service on how to treat transactions in this sphere?

What we know:

  • Virtual currency is very much on the radar of the IRS.
  • The IRS has issued guidance on cryptocurrency with Notice 2014-21.
  • This guidance is very general and creates as many questions as it answers.
  • Virtual currency is property in the eyes of the IRS. 

What we can tell you:

  • Virtual Currency as property can be taxed similar to how people think about a stock. Capital gains tax rules are in play with these transactions, and as such holding periods. 
  • Cost basis rules apply to virtual currency.
  • Capital gains and losses can be generated by just holding cryptocurrency for a period of time. The rules around realized and unrealized gains apply here. 
  • Mining of virtual currency creates ordinary income, and is subject to self-employment income if a person is in fact self-employed. 
  • Getting paid via virtual currency for services would be ordinary income to the recipient.
  • Virtual currency is not taxed in the same manner as coins or bullion.
  • There are at least two different styles of cryptocurrencies and they are taxes differently. 

What is unclear:

  • 1031 exchange rules as applied to cryptocurrency are in no way well defined.
  • Can a virtual currency issuance be a complicated, bifurcated financial instrument with both ordinary income and capital gains income implications?
  • As of the date of this post, guidance on Form 1099 issuance rules from the IRS for crypto currency transactions is not well defined. 
  • How does IRS rules around constructive receipt effect restricted issuances of these currencies?

How we can help:

Virtual currency taxation is still very much a facts and circumstances matter at this point. No two transactions may be alike. If you are thinking about a virtual currency transaction and you are unclear of the taxation of this transaction, get in touch with us. We can help. 

dbbmckennon is a full service CPA firm with offices in Orange County, San Diego and Santa Monica.  We specialize in companies filing with the SEC and utilizing equity crowdfunding through Reg A+ and Regulation Crowdfunding. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.