What is Cryptocurrency? Cryptocurrency is a virtual currency or representation of money or value. However, it is not legal tender of any government. Cryptocurrency is similar to the U.S. dollar in that it can be used to purchase goods and services, and it can also rise and fall in value depending on supply and demand. Bitcoin, for example, is set to produce a limited supply. In addition to Bitcoin, there are several other types of cryptocurrencies such as Ethereum and Ripple.
Unlike the U.S. dollar, cryptocurrency is treated as property for federal income tax purposes. This means that you will have a capital gain or loss when you either sell it, exchange it, or trade it. Whether you have a capital gain, or a capital loss depends on how long you hold it. If you hold the currency for more than a year, you will have a long-term capital gain or loss. If you hold the currency for less than a year, you will have a short-term capital gain or loss. Additionally, if you receive cryptocurrency in exchange for goods or services, it is taxable to you as ordinary income. To illustrate this further, imagine you purchased 1 Bitcoin for $10.00 U.S. dollars. If the next day, you purchase a $15.00 pizza using your 1 Bitcoin, you would have a short-term taxable gain of $5.00. This is because you purchased the Bitcoin for $10.00 but exchanged it for $15.00, thus recognizing a $5.00 increase in value. Additionally, the gain would be short term since it was held for less than a year. The pizza store would have $15.00 of ordinary income.
It’s important to note that buying a cryptocurrency is not a taxable event, but you should log the details of the transaction in order to properly capture the tax consequences in the future. Cryptocurrency can have many tax consequences. If you are unsure how to account for your cryptocurrency or thinking of investing, be sure to consult your local tax attorney or CPA. You can read more about cryptocurrency at IRS.gov/virtualcurrency.