How is virtual currency, like Bitcoin, treated for tax purposes? (updated 2020)

The IRS is continuing to build their team to ensure people are compliant as it relates to reporting virtual currency.

Virtual curency is treated as property for tax purposes. This includes bitcoin and other forms of similar digital representations of value that act as a substitute for real currency.

Taxpayers who sell or exchange virtual currency will recognize gain or loss on the transaction. The profit or loss will be capital gain or loss if the bitcoins were held for investment, similar to stocks or bonds. If you held the virtual currency for more than one year before selling or exchanging it, then the capital gain or loss is long-term and subject to preferential tax rules. Otherwise, it is short-term.

Taxpayers who accept bitcoin as pay for services have ordinary income equal to the value in U.S. dollars on the date of receipt. Your tax basis in the bitcoin is that same value. Employers that pay wages with bitcoin or other cryptocurrency report the U.S dollar value on W-2s. Ditto for businesses that send out 1099 forms.

The content from this post was taken from Kiplinger.