Revenue Ruling on Virtual Currencies: What You Need to Know

Virtual Currency, as defined by the Internal Revenue Services (IRS), is a digital representation of value. This is different from real currency, but both have similar characteristics and functions in the sense that they are both units of account, and are used as a store of value and a medium of exchange.

Some virtual currencies are convertible and at times, can even substitute real currency. A lot of people are now fascinated with virtual currencies. Some even use it for certain transactions. Hence, the IRS released information about cryptocurrencies and its tax treatment. Out of all the details, these are the very basics that you should know.

Virtual Currency as Property

Virtual currency is considered property and is thus subject to federal income taxes. This means that general tax principles also apply to virtual currency, including capital gains tax whenever it is sold or exchanged.

Virtual Currency as Payment for Services / Compensation

As payment or compensation for services (whether in employment or not), the use of virtual currency is considered ordinary income. Therefore, it is subject to federal income tax withholding and reportable on form W-2. It is considered self-employment if paid to an independent contractor, which is still subject to self-employment tax.

Cryptocurrency Exchange or Peer-to-Peer Transaction

If a transaction is done through a cryptocurrency trading platform, the basis for its value is the amount recorded by the cryptocurrency exchange (in US dollars). On the other hand, if the transaction is an off-chain transaction, then the value would be the fair market value of the cryptocurrency during the date and time of the exchange or transaction. The same rule applies to peer-to-peer transactions.

No Published Value Cryptocurrency

The fair market value of the cryptocurrency upon exchange will be used in instances where there is no published value.

Virtual Currency as a Gift

Virtual currencies that are received as a gift are not considered income until they are sold, exchanged or disposed of.

Virtual Currency as a Charitable Contribution

There is no recognized income, gain, or loss if a virtual currency is donated to a charitable organization. If virtual currency donation has been held for more than a year, the deduction is generally equal to the fair market value of the virtual currency at the time of the donation.