Digital assets, such as Bitcoin that debuted in 2009, have gone mainstream and total about $2.75 trillion worldwide. Despite the prevalence of digital assets as investments as well as their use in commerce, the IRS has only issued limited guidance. Nonetheless, taxpayers must determine whether their virtual currency transactions are taxable and reportable.

Overview

Virtual currency is defined by the IRS as 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. Virtual currency goes by a number of names, including digital assets and cryptocurrency. The IRS ruled that cryptocurrencies are property, not currency (Rev. Rul. 2014-21). As such, the general rules applicable to property transactions apply to transactions using virtual currency.

Investors