Virtual currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.
In particular, virtual currency does not have legal tender status in any jurisdiction. Virtual currency serves as a digital representation of value that is generally tracked through a blockchain or software.
In the U.S., cryptocurrencies like Bitcoin, Ethereum or Cardano are treated as property for tax purposes.
General tax principles applicable to property transactions apply to transactions using virtual currency.
Tax Basics
- When received, fair market value (FMV) at time of receipt determines income or amount realized.
- Basis based generally on value at time of receipt.
- FMV may be determined by value on established exchange.
- Use of cryptocurrency to purchase/pay is a disposition giving rise to gain/(loss).
Tax Consequences
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
The IRS issued IRS Notice 2014-21, IRB 2014-16, as guidance for individuals and businesses on the tax treatment of transactions using virtual currencies.
Please check our Frequently Asked Questions on Virtual Currency Transactions for individuals who hold cryptocurrency as a capital asset and are not engaged in the trade or business of selling cryptocurrency.
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