With approximately 13 percent of Americans investing in virtual currency in the last year, it's increasingly common for investors to seek answers about virtual currency and taxes. How virtual currency impacts your tax bill depends on how you obtain the currency and how long you hold it. Here's what you need to know about virtual currency and taxes.
The IRS Labels Virtual Currency as Property
The IRS doesn't view virtual currency as it does monetary currency. Since the value of virtual currency fluctuates, the IRS categorizes virtual currency as property.
If you purchase virtual currency, this isn't a taxable transaction. However, when you sell the currency, this is a taxable event.
Generally, if you hold the currency for less than a year and it increases in value, you'll pay a higher short-term capital gain rate on this increase.
Should you hold the currency more than a year before you sell it, increases in value are taxed at a lower long-term capital gains rate.
Your virtual currency may decrease in value. If so, you can deduct up to $3,000 of the loss on your taxes and potentially carry amounts that exceed $3,000 forward to deduct in later tax years.
Payments or Compensation Made with Virtual Currency are Taxable
If you receive virtual currency as part of your compensation or as a payment for your business's products or services, you'll report the currency's fair market value on the day you receive it on your taxes. Even if the currency later increases or decreases in value, your tax obligation is based on the value when you received it.
You might decide to use virtual currency to pay workers or companies. For tax purposes, payments that you make with virtual currency aren't an expense. Instead, they're considered capital transactions.
Since you have to sell your virtual currency to make the payment, the impact on your taxes depends on any changes in the currency's value since your date of attainment and your holding time.
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*This article is meant for informational purposes only and should not be considered professional advice.