IRS Sending Letters to Virtual Currency Owners

The IRS has sent letters to taxpayers that own virtual currency reminding them of their tax obligations. In the letters, taxpayers are urged to review their past returns and amend the returns if they have omitted taxable virtual currency transactions. Taxpayers that do not properly report the transactions could be liable for back taxes, interest, and penalties.

The IRS considers virtual currency to be property, rather than currency. Thus each sale or conversion of virtual currency triggers a taxable transaction. This includes trading one virtual currency for another. Taxpayers realize a gain or loss on the difference between the fair market value when sold or converted minus the cost of the virtual currency. Gains are reportable as either ordinary income or capital gains. Are losses deductible? Depends....

If the owner is strictly an investor in the virtual currency, losses are deductible as capital losses. Those losses can offset capital gains. Any excess of losses over gains can be deducted up to $3,000 ($1,500 if married filing separately) each year, with the excess carried forward to offset gains in future years.

If the owner buys virtual currency and uses it for personal reasons, the losses are not deductible since they are personal losses. The gains are still taxable. If the owner was primarily an investor but converts some of the virtual currency for personal use, they could have jeopardized the ability to deduct the losses in the account by using it for personal reasons. It is very important to keep invested virtual currency separate from personal use virtual currency if possible. It is important to keep accurate records, which should include purchase dates and sales and the fair market values at those times.

Virtual currency can be "mined", or created. When a taxpayer "mines" virtual currency the fair market value of the virtual currency is reportable as income when received.

As you can see, using and owning cryptocurrency can complicate your return, if you need to discuss issues relating to cryptocurrency pleas contact us.