Ask the expert: Do I have to Report Gains Made Through Trading Cryptocurrencies?

In a word? Yes.

In IRS Notice 2014-21 the Internal Revenue Service advises that, virtual currency or commonly known as cryptocurrencies such as Bitcoin are not considered to be currency (they consider it property), investors must report any gains made in the trading or use of cryptocurrencies. Taxpayers who realize a gain in cryptocurrency must report the cash equivalent (in USD) as of the date of the transaction (buy/receive and sale/use.)

The IRS is also taxing any gains realized in the buying and selling of products with the use of cryptocurrencies. To determine gain, or potential loss, on the use or sale of cryptocurrency it is imperative to track the cost basis of each unit. Losses on the sale or use are only allowed if the cryptocurrency is held as an investment or used in a trade or business. Therefore, it is advisable to keep detailed records of the acquisition price of cryptocurrency, all transactions involving the use or sale of cryptocurrency, and support for whether it was held as a business asset, an investment, or a personal asset.

While not as common, the IRS is also taxing gains made via the mining of cryptocurrency. Cryptocurrency mining describes the use of one’s computer to solve complex calculations to process and validate transactions on a blockchain network. For providing this service, miners are compensated with cryptocurrency.

What’s more, the IRS has shown that they are very serious about identifying and taxing this type of income when they sued cryptocurrency provider Coinbase to compel them to provide to provide the names and identification of persons using their cryptocurrency service. Contact your Zinner & Co. tax expert to see what this might mean to your tax liability.