FAQs four through ten provide particularly interesting guidance on often uncertain interpretations of transactions and crypto uses for consumers (i.e. taxpayers):
Q4. Will I recognize a gain or loss when I sell my virtual currency for real currency?
A4. Yes. When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. For more information on capital assets, capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets.
Q5. How do I determine if my gain or loss is a short-term or long-term capital gain or loss?
A5. If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss. If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss. The period during which you held the virtual currency (known as the "holding period") begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency. For more information on short-term and long-term capital gains and losses, see Publication 544, Sales and Other Dispositions of Assets.
Q6. How do I calculate my gain or loss when I sell virtual currency for real currency?
A6. Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars. For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.
Q7. How do I determine my basis in virtual currency I purchased with real currency?
A7. Your basis (also known as your "cost basis") is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in U.S. dollars. Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars. For more information on basis, see Publication 551, Basis of Assets.
Q8. Do I have income if I provide someone with a service and that person pays me with virtual currency?
A8. Yes. When you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income. For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.
Q9. Does virtual currency received by an independent contractor for performing services constitute self-employment income?
A9. Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.
Q10. Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?
A10. Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer's Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.
For the first time since 2014, the Internal Revenue Service on Wednesday offered formal guidance on cryptocurrencies like Bitcoin. While the new information clears up some long standing accounting questions, it also could expose anyone who owns cryptocurrency to unpleasant tax predicaments. The guidance came in the form of a lengthy 'Frequently Asked Questions' documents that provided new details about how the agency's 2014 position—which declared Bitcoin and other digital assets to be property—should apply in practice. According to Katya Fisher, a cryptocurrency attorney at Greenspoon Marder in New York, "Anyone who understands the tax code shouldn’t find anything in here shocking or new. If you understand capital gains and how property is taxed, this is just a plain English iteration of those concepts," says Fisher.