Manny Trelles, CPA
Recently, the IRS issued additional guidance on crypto and virtual currency. The guidance addressed concerns regarding the timing of income recognition, tax basis, and clarification on terms in cryptocurrency transactions.
Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Virtual currency is a digital representation of value only available in electronic form.
Cryptocurrency and income recognition
A taxpayer who provides goods or services and receives an airdrop or payment in virtual currency has taxable income equal to the fair market value of the virtual currency.
Example: Bob received 25 units of Crypto S in an airdrop, therefore, he has ordinary income in the tax year he receives the Crypto S. He has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger. Bob now has the ability to dispose of Crypto S. The amount included in Bob’s gross income is $50, the fair market value of the 25 units of Crypto S when recorded on the distributed ledger. Bob’s basis in Crypto S is $50, the amount of income he recognizes.
Fair market value reporting
Taxpayers must report their virtual currency transactions in U.S. dollars using the fair market value at the time of receipt. If a market exists for the virtual currency, you must use that value at date received.
Gain or loss from the sale virtual currency transactions
Taxpayers who exchange virtual currency for other property have gain or loss on the transaction. The amount of gain or loss is based on the difference between the fair market value of the property received and the adjusted basis of the property given up. The taxpayer reports these transactions on Form 8949 and Schedule D as short or long term capital gain.
Compensation for services
Employees who receive virtual currency from their employer as payment must include the fair market value of the virtual currency in income. Employers report and withhold on these amounts on the employee’s W-2.
Example: Nicole’s employer pays her November wages with two bitcoin on November 30, when the price of bitcoin on an exchange is $7,879.05. Nicole’s wage income for November is $15,758.10.
For additional information from the IRS, please visit: Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (irs.gov)
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