By Alan Shevins, CPA

While investing and speculating in Bitcoin, Litecoin, and other cryptocurrencies, whether in digital or virtual form, have become increasingly popular, understanding the tax ramifications has not shared the same level of excitement.

The IRS treats cryptocurrencies more like securities and property rather than as a currency. Activity in this medium is treated as a purchase or sale of property where gains and losses are reported as capital gains and losses unless your trading activity rises to the level of a dealer. Dealer status is rare and beyond the scope of this discussion. Cumulative net capital losses on an individual tax return are limited to $3,000 per year and losses exceeding the limit are carried forward to future years.

Investors & speculators in cryptocurrencies may convert coins from one type to another or use the coins to purchase goods or services. These are considered taxable events requiring a determination of your gain or loss as measured by the difference between the cost and the fair market value on the day of each transaction. The new coin or property receives a cost basis equal to the fair market value of the coin or property given up on the date of conversion. In the absence of specific-identification of the cryptocurrency being converted, the IRS likely defaults to the first-in first-out basis for determining the basis of the coin being converted. The Section 1031 Like-Kind Exchange rules that defer gain on trades are not available for cryptocurrency conversions.

Those in business who receive payments in virtual currency would treat the receipts as income like any other form of payment Miners have income on the day that the coin is created based on the fair market value at the time of creation. Mining income is reported on the “Other income” line of Form 1040, unless the activity rises to the level of trade or business.

We may be able to answer other questions that you may have on this topic. Please contact our office or reach out directly to me at Moser & Company, CPAs with your cryptocurrency tax questions.