If you’re trading in cryptocurrency you’re going to have to report any gain/loss on your return.

The Internal Revenue Service (“IRS”) and the Securities and Exchange Commission (“SEC”) have repeatedly forced cryptocurrency exchanges into revealing transactions and users with the obvious intent to enforce tax and securities compliance.

Cryptocurrency and blockchain are in the news pretty much daily. With sites like Coinbase that allow for more user friendly exchanges or Robinhood a stock trading platform that has expanded into trading cryptocurrencies the average investor is more likely than ever to trade in these assets as an investment.

First off what is a cryptocurrency? A cryptocurrency is a digital asset designed to function as a medium of exchange. It uses cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. These records are recorded on a ledger called Blockchain (We’ll save that for another day) which is distributed across numerous machines. This makes it very difficult to alter the record fraudulently.

For this article the important thing is that you can buy and sell cryptocurrencies as an investment.

We’re not going to cover how you report wages paid to you in cryptocurrency or income from mining cryptocurrency.

The IRS currently treats cryptocurrencies as an asset rather than a currency. That means when you buy the cryptocurrency there are no tax ramifications. There are no tax ramifications to holding the cryptocurrency. When you sell the cryptocurrency for more than you purchased it you have short/long-term capital gain and if you sell it for less than you purchased it you have a short/long-term capital loss. Essentially the cryptocurrency is treated as if it were a share of stock for tax purposes.

This is only applicable of you hold the cryptocurrency as an investment. If you’re using to buy goods and services, as it was intended to be used for, it’s a bit different. As with other assets held for personal use you still pay tax when you sell at a gain, but you cannot deduct the loss if you lose value.

For example: I use USD to purchase Dogecoin (yes it’s a real cryptocurrency.) and I use those coins to buy a pizza. If the value of the coins increased from the the time I purchased them to the time I bought my pizza that’s a gain and I have to pay tax on it. Let’s assume I purchased $10 in coins and when I bought my pizza I paid $12 because the coins were now worth $12 i have to report $2 of income and pay tax. When the values moves the other way around and my coins were worth only $8 and I had to pay the last $2 in USD I don’t get to deduct that loss. Yes, that doesn’t seem fair but that’s the way the law is written. Call your Senator and complain.

When tax time comes if you were buying and selling cryptocurrencies as an investment you will need to provide records of all cryptocurrency sales to your tax preparer or report them on a Schedule D Capital Gains & Losses.

This is also how you report gains if you were using cryptocurrency for personal expenses and the value went up while you held them and you spent that money while you held them.

This is obviously just touching the surface of cryptocurrency. If you need professional advice regarding planning or reporting your transactions let us know.