Virtual currencies create new tax treatments and reporting requirements

Do you own any cryptocurrency or invest in digital assets? EY TaxChat™ can help with the tax reporting requirements on your annual tax returns.

In brief

• The IRS is aware and closely watching the reporting of and proper treatment of digital asset transactions.
• Make sure to report all of your transactions properly on your tax filings.
• Reporting cryptocurrency transactions can be tricky and complicated, but EY TaxChat™ can help you with the proper reporting on your return this year. 

What is virtual currency?

Virtual currency is a digital representation of value, other than a representation of the US dollar or a foreign currency (“real currency” or “fiat currency”), that functions as a unit of account, a store of value and a medium of exchange. Some virtual currencies are convertible, which means that they are intended to have an equivalent value in real currency. The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.

What is cryptocurrency?

Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality.

Sale or exchange of virtual currency

When a person sells virtual currency, they must recognize any gain or loss on the sale, regardless of whether cash or another virtual currency is received in return, and the loss is subject to any limitations on the deductibility of losses.

Use of virtual currency for purchases

If virtual currency is exchanged to purchase goods or services, the taxpayer will need to report the sale of the virtual currency used for the purchase, which could result in a gain or loss depending on the fair market value of the property received and the adjusted basis in the virtual currency exchanged.

Provision of services

Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual other than as an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in US dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

Other income

Any income received from staking, mining, earn products, hard forks, airdrops and other similar items is considered as ordinary income at the value of the asset on the date received.

About EY TaxChat™

EY TaxChat is an on-demand mobile service that connects you with a licensed tax professional who will prepare your taxes and file them for you. Click here to learn more and register for EY TaxChat at any time, from anywhere, or by downloading the app from the Apple App Store or GooglePlay Store.

This information is provided solely for educational purposes; it does not take into account any specific individual or entity’s facts and circumstances. It is not intended, and should not be relied upon, as tax, accounting or legal advice. Ernst & Young LLP expressly disclaims any liability in connection with the use of this presentation or its contents by any third party. Neither EY nor any member firm thereof shall bear any responsibility whatsoever for the content, accuracy or security of any third-party websites referenced.