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Planning to buy crypto assets with fiat currency in US? Top 5 questions answered by IRS.

The Internal Revenue Service, also known as the IRS, is the revenue service of the United States federal government. The body publishes tax forms which taxpayers are required to choose from and use for calculating and reporting their federal tax obligations. In addition to collection of revenue and pursuing tax cheaters, the IRS issues administrative rulings such as revenue rulings and private letter rulings.

All in all, any monetary affairs happening in the United States are also authorized by this body and all this is applicable for virtual currencies/cryptocurrencies too. Here are the 5 important FAQ’s answered by the IRS.

Q1: What is cryptocurrency?

According to the IRS, 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.  A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.

Q2: What is a virtual currency?

Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real 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 have an equivalent value in real currency or act as a substitute for real currency.  The IRS uses the term “virtual currency” in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.

Q3: Is virtual currency treated for Federal Income tax purposes?

Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

Q4: Will I recognize a gain or loss when I sell my virtual currency for real currency?

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.

Q5: How do I determine my basis in virtual currency I purchased with real currency?

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.

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