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Tax Treatment For Cryptocurrency

The Accounting Industry: Can Firms Keep Up?

Virtual currency is becoming more and more commonplace in today's market, but what about its tax treatment? Is it property? Is it currency like cash? How is it accounted for? These are all questions that deserve answers. Now that virtual currencies such as bitcoin are becoming more stable, many investors and other citizens are getting closer or already have some sort of virtual currency investment. But what is the best tax treatment for virtual currency?

Firstly, virtual currency is treated like property. The best way to think about it is like stocks or other investments like stocks. If you are paid in virtual currency you must recognize a gain or loss based on the fair market value, and the same if you pay for something in virtual currency. The fair market value is measured at the date sold/given in all virtual currency situations. This also applies to charity, and virtual currency is treated as a non-cash contribution. Another example would be if you were paid by your employer in bitcoin, you would need to include the fair market value in that income. On the other side of things, if you were to pay salary in virtual currency to employees, you would have to do withholding on the fair market value of the currency.

Most virtual currency transactions take place in a cryptocurrency exchange and this exchange should keep a record of the trading values and amounts so that is an easy way to find information about past transactions, but if that is not available, the fair market value is whatever the particular virtual currency traded for on that date. Of course, the basis would be recorded on what was paid on the date of receipt, in fair market value of the currency used to purchase it. (ie. The U.S dollar or other currency) In addition, any payments of virtual currency made over the value of $600 would result in a 1099-misc needed to be filed, so keep this in mind.

By: Luke Hamilton, Tax Staff at CROFT & FROST


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