Virtual Currency

by Shalen Singh
Jun 6, 2022

Virtual Currency is becoming a major tax issue nowadays.

Are you dealing with Virtual Currencies in your daily lives? Have you invested in Virtual Currencies recently?

What is virtual currency?

A virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or store of value such as Bitcoins, Cryptocurrency, etc.

Virtual Currencies are treated as property and general tax principles applicable to property transactions apply using virtual currency.

However, virtual currency is not treated as currency hence foreign currency gain/loss is not recognized.

Payment for goods and services using virtual currencies

A taxpayer who receives virtual currency as payment for goods and services must, in computing gross income, include the fair market value (FMV) of the virtual currency. The FMV will be the basis for the goods/services. FMV is determined using the exchange rate and the date of the transaction.

If the FMV of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

Mining Virtual Currencies

If a taxpayer’s mining of virtual currency constitutes a trade or business, and the mining activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax. Mining Virtual Currency – taxpayer uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.

Compensation using virtual currency

If an employer pays the employee a virtual currency for services, this constitutes wages for tax purposes.

Taxpayers may be subject to penalties for failure to comply with tax laws.

Overall, Virtual Currency is a property, not a currency. It generates capital gains or losses as they are property transactions. Mining virtual currency generates ordinary income; it is subject to self-employment tax on trade or business. When a taxpayer receives cryptocurrency in a hard fork, he/she has ordinary income when the taxpayer has dominion and control over the coin received.