Virtual currency is a form of digital currency, which possesses a monetary value. The IRS is currently placing more focus on the reporting of virtual currency transactions. Virtual currency can function as a medium of exchange, unit of an account, and/or a store of value. If virtual currency possesses a real currency equivalent, this is referred to as a convertible virtual currency. Bitcoin, Ether, Roblox, and V-bucks are some common examples of convertible virtual currency. Understanding what is virtual currency and the tax implications of holding such investments is more important as the 2019 Form 1040 includes a new checkbox inquiring about virtual currency transactions.
In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938 explaining the treatment of virtual currency for Federal income tax purposes. Tax consequences that could result in a liability can arise from the sale or exchange of virtual currencies, holding virtual currencies as an investment, or the use of virtual currency for the payment of goods. For federal tax purposes the IRS treats virtual currency as property. General tax principles that apply to property transactions also apply to virtual currency. The IRS has compiled a general list of transactions that are taxable here. In addition the IRS has provided a list of FAQ’s, with answers regarding virtual currency transactions here. It is important to be aware that taxpayers must properly report income tax consequences of virtual currency transactions. If not properly reported, the taxpayer could be held liable for penalties and interest. By August 2019, the IRS had sent out over 10,000 letters to taxpayers with virtual currency transactions that may have failed to report income from these transactions or improperly reported the transactions on their tax returns.
If you have any questions about the tax implications of virtual currency transactions, please reach out to a BC+S tax advisor.