How is Virtual Currency Taxed by the IRS
Virtual currency is becoming increasingly common as an alternative source of compensation or payment or as an investment. Bitcoin, ethereum, dogecoin, litecoin, and utility tokens are a few common forms of virtual currency.
With more individuals and businesses utilizing virtual currency, you may wonder how the IRS treats it for taxation purposes. Here’s what small business owners need to know about the IRS’s treatment of virtual currency.
The IRS Views Virtual Currency as Property
The IRS considers virtual currency a type of property. For taxation reasons, virtual currency is designated as a capital asset. This means that the taxation of virtual currency is different than the procedures used for monetary currency.
With monetary currency, a dollar is always equivalent to a dollar. Even if inflation or other financial factors have altered the value, a dollar is always equal to one dollar for taxation reasons.
The taxation of virtual currency by the IRS depends on two factors: the length of time that you own the property (the holding period) and the amount used to obtain the property (the basis).
Taxation of Virtual Currency Depends on How You Acquire It
If you purchase virtual currency yourself as a business asset, it’s treated entirely as a capital asset. While the purchase of a capital asset isn’t a taxable event, you do need to save records noting the details of the transaction.
When you sell the capital asset, this is a taxable event. The amount of taxes that you pay depends on the holding period and basis for the currency.
If you hold the currency for less than a year before you sell it, it’s deemed a short-term asset and taxed at your ordinary income tax rate. However, if you hold the currency for a year or more, it’s deemed a long-term asset and taxed at a lower rate.
Should you sell the virtual currency for more than you paid for it, the IRS recognizes this event as a capital gain. However, if the value of the currency has dropped since you acquired it, it’s considered a capital loss.
When you receive virtual currency as payment for goods or services, the IRS considers it both income and a capital asset. To report virtual currency as income, you’ll report the value on the day that you receive it. Then, when you sell the currency, you’ll follow the taxation procedures for capital assets.
Need more guidance regarding the taxation of virtual currency by the IRS? Contact Gurian CPA firm to request a meeting!
