Cryptocurrency and blockchain are rapidly becoming a part of the U.S. landscape, but knowledge varies greatly on these topics and their applications. Below we will define what cryptocurrency and blockchain are, and how the IRS taxes cryptocurrency.
Blockchain-a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network
Cryptocurrency-a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Bitcoin is a type of cryptocurrency, and is currently the most popular cryptocurrency on the market.
For a good explanatory video on the mechanics of Bitcoin and blockchain, please click here.
IRS Taxation of Cryptocurrency
For U.S. tax purposes, cryptocurrency is treated as property, and the basis of cryptocurrency is measured at the fair market value in U.S. dollars as of the date the cryptocurrency was received. To determine the fair market value in U.S. dollars as of this date, taxpayers must find the exchange rate. The historical exchange rate for Bitcoin can be found here.
When calculating gross income for U.S. tax purposes, taxpayers who receive cryptocurrency as payment for goods or services must include the fair market value of that cryptocurrency, measured in U.S. dollars as of the date the cryptocurrency was received.
Form 8949 should be used to add up each cryptocurrency transaction (along with any other capital gains) and the calculated totals should be reported on Schedule D. Most popular exchanges only send Form 1099-K’s to large institutional investors. If you or your business has not received a 1099-K, most popular exchanges provide a transaction record that shows the dates and amounts when you bought and sold cryptocurrency, which you can reference when filling out Form 8949.
Taxpayers who “mine” cryptocurrency are required to include the fair market value of the cryptocurrency as of the date of receipt in gross income.
HLB Gross Collins, P.C. keeps up to date on all issues affecting the technology industry, and has been serving some of the Southeast’s most prominent software and technology companies for nearly 50 years. Our Technology Practice works closely with our clients to ensure they are correctly accounting for and understand the tax implications for cryptocurrency transactions.
- Alex West, CPA