The intrigue of "anonymous" ownership of virtual currency (or cryptocurrency) has led many to believe this commodity is flying under the IRS's tax radar.
Nothing could be further from the truth.
Since 2015, IRS Criminal Investigation continues to build a cybercrime program and now has a cybercrime coordinating officer in each of CI's 21 field offices. CI notes in its annual report that crypto crime is a top priority for the immediate future. Efforts to expose those failing to report virtual currency transactions have led the IRS to issue "John Doe Summons" on virtual currency operators and brokers to obtain their customer lists. Thus far, the summons process has withstood challenges in federal courts around the country and the IRS is getting that customer information.
The IRS issued Notice 2014-21 in early 2014 which announced their position that virtual currency will be treated as property and general tax principles applicable to property transactions will apply to transactions using virtual currency. Virtual currency is NOT considered a foreign currency.
Thus, just like any item of property, generally, when you sell for a profit, you have a reportable capital gain. When you sell for a loss, you have a deductible capital loss subject to any limitations on capital losses.
The tricky part of virtual currency is often in determining the cost basis of your holdings. There are so many different transactions and fractions of a "coin" that often taxpayers are at a loss of exactly what they originally paid for the coin.
It is absolutely necessary that you maintain excellent purchase records since many of the brokerages that manage your virtual currency sales only report the gross proceeds from the sale (the sale price) and not your original purchase price. Without that original purchase price, you are unable to determine a profit or loss--and you may be paying income tax when you should have a deduction!
A brief IRS FAQ on virtual currency can be found at this link
Bottom line: if you are a virtual currency trader you should be familiar with the rules of the game. Report your transactions as required and you will have nothing to fear if the taxman comes calling.
The information above is intended to provide a general overview of the topic presented. It is not intended to be a legal interpretation of your tax situation. Always seek advice from a licensed professional when determining how this information affects you. This article does not in any way establish an attorney-client relationship. That relationship can only be accomplished with both parties signing a mutual agreement engagement letter.
