Tax guidance on virtual currency transactions

virtual currency tax rules, cryptocurrency tax rules, when to report cryptocurrency, how to report virtual currency
In October 2019, the IRS released additional guidance on the tax treatment of virtual currency transactions. The IRS released the guidance in the form of a Revenue Ruling (Rev. Rul. 2019-24). The revenue ruling provides further guidance relating specifically to accounting for, valuing, and reporting virtual currency. Additionally, it is important to note that the following guidance relates only to taxpayers holding cryptocurrency as a capital asset. Below, I will detail several tax rules surrounding virtual currency transactions, including recognizing a virtual currency transaction, valuing a virtual currency transaction, and reporting a virtual currency transaction. If you buy, hold, and/or sell cryptocurrency, it is essential to have a strong understanding about virtual currency tax law to avoid paying tax penalties.

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When to recognize a virtual currency transaction?

You should recognize the cryptocurrency transaction on the date and time the virtual currency ledger records the transaction. Further, you should confirm the ability to sell, exchange, or dispose of the cryptocurrency on said date.

The following types of common cryptocurrency transactions qualify as taxable transactions:
  • Exchanging virtual currency for another virtual currency
  • Receiving cryptocurrency as a payment for services
  • Paying for services with cryptocurrency

How to value a virtual currency transaction?

The standard property tax rules apply to virtual currency transactions. If you understand property tax laws, you should apply those laws to cryptocurrency exchanges, sales, and dispositions.

The virtual currency valuation should be based on the fair market value when you record the transaction. When receiving virtual currency, simply recognize gross income based on the fair market value of the cryptocurrency received. When exchanging cryptocurrency, simply recognize a gain or loss based on the FMV of the cryptocurrency received and the adjusted basis of the cryptocurrency exchanged.

If unable to determine the fair value via the exchange, you should use a cryptocurrency explorer to determine the readily available fair value of the virtually currency involved. Other means may be necessary to determine fair value if the cryptocurrency explorer fails to establish value.

How to report a virtual currency transaction?

When selling, exchanging, or disposing of the cryptocurrency, you can choose which cryptocurrency units are deemed sold, exchanged, or disposed of. However, in order to do so, you must be able to identify the unit and differentiate its adjusted basis and holding period from other units. If unable to do so, you must use the FIFO (first-in-first-out) approach to determine the basis of the sold, exchanged, or disposed of units.

It is important to note that fees and commissions are included in the basis of purchased virtual currency.

Lastly, any income, gains, or losses resulting from a virtual currency transaction must be reported on your federal tax return.

In conclusion

Many people are unsure about the tax laws surrounding virtual currency transaction. Those who buy, hold, and sell cryptocurrencies should benefit from reading the post. You should now know when to record a virtual currency transaction, how to value the cryptocurrency involved in a transaction, and how to report the virtual currency transaction on your tax return. Please share with others to help them learn the basic tax rules relating to cryptocurrency transactions. Please comment below if you have any questions relating to virtual currency.

Disclaimer
Textbook Tax does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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