You’re probably aware of Bitcoin. The virtual currency had a meteoric rise and fall in 2017. This was well documented by news headlines and created a cryptocurrency mania. If you’re a trader looking to capitalize on the volatility, a tech savvy person interested in mining, or someone looking for a long term investment you may be wondering if you can benefit from virtual currencies. However, I’m guessing you don’t want to start playing a game without first considering all the rules. This article explains some of the tax considerations of mining, investing or trading virtual currencies.

How are cryptocurrencies treated for federal tax purposes?

Virtual currencies are treated as property for U.S. tax purposes. They are not treated as currency that could generate foreign currency gain/losses.

What are the taxable events?

• Mining virtual currencies is a taxable event. Miners must include in taxable income the fair market value in U.S. Dollars of the virtual currency on the day it’s received.
• If a taxpayers sells or receives anything in value for the virtual currencies they must report the gain/loss on this transaction.
• Taxpayers should tread lightly using the virtual currencies for personal expenses as the losses may be nondeductible.
• If a taxpayer receives virtual currency as payment for goods or services they must include in taxable income the fair market value in U.S. Dollars of the virtual currency on the day it’s received.
• There is no tax impact of purchasing virtual currencies or for unrealized gains/losses.

What is the taxpayer’s basis?

The taxpayer’s basis is the fair market value in U.S. dollars on the day they received the virtual currency.

If you incur expenses, are they deductible?

For those Mining virtual currency:

• Taxpayers can deduct the expenses against their income if they’re engaging in a trade or business to earn a profit.
• If the activity is considered a hobby, the taxpayer must follow the hobby loss rules and may lose out on the deductions.

For investors and traders:

• Certain investment related expenses may qualify for 2% miscellaneous itemized deductions. However, these are being repealed through 2025 by the Tax Cuts and Jobs Act.

Are you sold yet? Carefully weigh the pros and cons (check out our blog, “Bitcoin- Should I Consider An Investment?”) and consider how an investment in virtual currency might impact your taxes. While the prospect of earning money by investing in virtual currency is tempting, make sure you’ve done your research.

If you have questions or would like to learn more on this topic, contact our tax professionals today!