Do you own virtual currency and are considered a North-American citizen for fiscal purposes? Stay on top of your tax obligations.
Below are frequently asked questions on the purchase and sale of cryptocurrency in the United States according to information published by the Internal Revenue Service (IRS), the revenue service of the federal government of the USA.
How is virtual currency treated in terms of US income tax purposes?
Cryptocurrencies are treated as personal property and not as physical currency such as the dollar or the euro, that is, tax principles that apply to the sale of goods also apply to operations that feature virtual currencies.
Do you have to report gains or losses on the sale of virtual currency?
Yes. Those who sell or buy a product or service with a virtual currency must declare gains or losses on the sale and are subject to limitations on the deductibility of capital losses.
How do we determine whether the capital gains or losses are long or short term?
It all depends on how long the currency has been held. If the person held onto the cryptocurrency for one year or less before carrying out the sale or trade, they will get a short-term capital gain. Those who held onto the virtual currency for more than a year receive a long-term capital gain or loss. The period that someone holds the currency is known as the “holding period” and begins the day after the purchase, ending on the day of sale or exchange.
How can we determine the cost basis of a virtual currency?
The value the purchaser spent to acquire the virtual currency is what constitutes the cost basis. This includes taxes, commission and other acquisition costs.
Do you have to declare incomes when performing a service and receiving in virtual currency?
Yes. When receiving a payment, be it in physical or virtual currency, for services rendered, regardless of if the person was formally contracted or not, it is mandatory to declare this revenue.
If an employer uses virtual currency to pay an employee, does this represent a salary for fiscal purposes?
Yes. Generally speaking, the way in which compensation is paid makes no difference when determining whether it is part of a wage for employment tax purposes. Therefore, the amount paid in virtual currency in salary format is subject to withholding income tax, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) and must be declared on form W 2.
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Written by Aline Ribeiro, Content Consultant at Drummond Advisors.