How to report Virtual Currency

This video explains what virtual currency is and all the reporting requirements associated with virtual currency. Hi everyone and welcome back. For those of you who are new to this channel, my name is Michael Marion, and I am a Certified Public Accountant at Marion & Associates, LLC. We have decided to start to put together a series of videos containing hot topic issues after seeing all the mistakes that have been made by individuals preparing their own tax returns. We hope these videos will provide those individuals with the knowledge needed to prepare their own tax return or to know when to seek out the advice of a tax professional. Please make sure to subscribe so you do not miss any of the new videos that get released. Please comment below if there is a certain topic that you would like to learn more about. If we notice enough people requesting the topic, we will make sure to develop a video on that specific issue. We are going to be discussing the latest hot topic issue within the IRS and the associated reporting requirements. Let’s begin.

In today’s episode we are going to explain how to report virtual currency. During this episode we are going to be using the terms virtual currency and cryptocurrency interchangeably.

In order to understand how to report virtual currency, we first need to know what it is. Virtual currency is a digital representation of value, other than real currency, that functions as a unit of account, a store of value, and a medium of exchange. Virtual currency is not considered currency in the eyes of the IRS and is treated as property for federal income tax purposes.

There are many ways to acquire virtual currency. We are going to be looking into these 4 ways in detail.

Individuals are able to mine for cryptocurrency by solving complicated math problems. If you are the first to solve the problem, you are issued virtual currency. When you receive the virtual currency, it is considered taxable ordinary income that is subject to self-employment tax. The taxable income would be the value of the virtual currency when you receive it. If you are solving these math problems by yourself, the income and expenses would be reported on Schedule C of the federal tax return.

Individuals have the ability to purchase virtual currency with cash. When you purchase cryptocurrency, your basis is equal to the amount that you paid to acquire it. When you eventually sell or exchange your virtual currency, you will have a reportable gain or loss.

When an individual exchanges a product for virtual currency, the individual will have a reportable taxable event. The reportable gain or loss will be the fair market value of the cryptocurrency on the day you received it compared to the basis in the product you exchanged for it. If the product you exchanged is considered a personal asset, you are not allowed to claim a loss on your personal tax return.

When an individual provides a service in exchange for virtual currency, the individual will have a reportable taxable event. The individual has taxable ordinary income equal to the fair market value of the virtual currency when it is received subject to self-employment tax.

Every time you sell or exchange virtual currency you will have a taxable event. If the cryptocurrency is held more than 1 year prior to being sold or exchanged, you have a long-term gain or loss. Otherwise, you will have a short-term gain or loss. Virtual currency follows the first in first out method when being disposed unless you are able to identify a specific unit.

When blockchain/ledger discovers an error, the cryptocurrency will go through a fork. A fork can be a hard fork or soft fork. In a hard fork, a new type of cryptocurrency is formed. If the individual does not receive any new cryptocurrency during a hard fork, there is no taxable income. If the individual does receive new cryptocurrency, there is ordinary taxable income equal to the fair market value of the new cryptocurrency when it is received.

When a cryptocurrency goes through a soft fork, no new currency is formed. Because the individual will not be receiving any new cryptocurrency there is no taxable income during a soft fork.

Starting on the 2019 tax return you will be required to answer if you received, sold, exchanged, or otherwise acquired any financial interest in any virtual currency. IRS mailed 10,000 educational letters to taxpayers who may have reported transactions involving virtual currency incorrectly. Taxpayers who did not report or incorrectly reported their virtual currency transactions may be responsible to pay additional taxes, penalties, and interest. The IRS requires taxpayers to maintain records that are sufficient to establish the positions being taken on their tax return. Also, if the virtual currency is held in a foreign country you may have a foreign reporting requirement.