Virtual currency, also known as cryptocurrency or digital currency, is an online medium of exchange. Bitcoin is perhaps the most well-known virtual currency, but there are now more than 2,200 such currencies being publicly traded. According to CoinMarketCap, as of Oct. 22, 2019, the total global capitalization of cryptocurrency exceeded $223 billion. Virtual currency is being used for investment and accepted as payment for goods and services by a growing number of businesses. From a tax perspective, the rules for the taxation of virtual currency are emerging.

Overview

In 2014, the IRS ruled (Notice 2014-21) that virtual currency is property, not currency, and is taxed as such. For example, Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies. For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Taxpayers are required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.