While the federal government may not recognize cryptocurrencies such as Bitcoin and Ethereium as substitutes for the US dollar, the IRS absolutely expects that transactions with such currencies be incorporated into US tax filings as appropriate. Activities giving rise to taxation and tax reporting requirements include, but are not limited to, mining, selling, and the business use of digital currencies to pay for services. Mining can give rise to self-employment income, sales generally create capital gains and losses, and paying your company’s workers in digital currency is treated the same as paying them in US dollars necessitating 1099 or W-2 reporting.
It’s probably not surprising that IRS guidance on virtual currency is dated and slim. For example, it doesn’t address airdrops or forks that essentially provide coin holders with more coin for free. It’s also unclear if holding cryptocurrencies through non-US exchanges such as Binance will require the holder to comply with foreign tax reporting requirements, which carry steep penalties for non-compliance. Despite this, the IRS has steadily been working to obtain insight into US holders’ digital currency transactions to ensure proper reporting on US tax returns. For example, Coinbase provided the IRS with data on thousands of its customers in early 2018.
As cryptocurrencies rise in usage, the IRS becomes more interested in taxpayers properly reporting transactions. If you have tax questions about your digital currency holdings or activities, please don’t hesitate to reach out to me.