Do you deal in Cryptocurrency – you may want to know the taxation rules in the United States.

  • by admin
  • November 29, 2022

What is virtual Cryptocurrency?

Cryptocurrency is also a familiar virtual currency in most countries of the world. Now the question is, what is virtual currency? In this discussion, we have used cryptocurrency or virtual currency and has considered that both are the same.

It’s a digital representation of monetary value that functions as a source of exchange, a unit of account. In some places, it uses a real currency, such as paper money and coins, in the USA and some other countries, designated as legal circulate and tenders; it is accepted as a medium of exchange in the issuance country. But Cryptocurrency doesn’t have legal tender status in the United States.

The virtual currency consumes the cryptography to secure and validate the digital transactions on distributed ledgers, i.e., a blockchain.

The Cryptocurrency that has equivalent monetary value in real currency or is deemed as a substitute for real money is converted into virtual currency. Cryptocurrency can be traded between users and exchanged into USA Dollars, Euros, and other currencies.

There are many cryptos in the market, like Bitcoin, Ethereum, Tether, U.S. dollar coin, Binance Coin, etc. As I understand, you mine crypto on your computer by installing a gaming card. Mining means you solve a question, and it is so complex that only a high-powered and efficient machine like a gaming card can solve it. You can mine individually or use a shared server. Due to the rise in the value of crypto, people started setting up their mining rigs.

The most commonly known is “Bitcoin,” you can say a leading Cryptocurrency or virtual currency.

There are so many terminologies in the area of virtual currency, like block, blockchain, difficult rate, hash, hash rate, mining pool, wallet, gas fees, etc., not known to common people who are not practicing crypto mining.

Tax Consequences of Cryptocurrency in USA:

The exchange and sale of other virtual currencies or use of these currencies to pay for services or goods, or holding the virtual money for investment all have tax implications. The profit earned from the crypto exchange or sale will result in tax liability.

The IRS issued IRS Notice2014 -21, IRB 2014-16, as a direction for businesses and individuals for tax treatment on revenue generated from virtual currencies.

For federal tax purposes, Cryptocurrency is treated as property; generally, tax rules apply to property transactions using virtual currency.   

  • An individual who receives Cryptocurrency as payment for services or goods must add in computing his gross income. For tax purposes, the value of the virtual currency is deemed to be the market value of that coin and measured in US dollars.
  • According to US tax rules, virtual currency transactions should be reported in US dollars. The taxpayer should determine the fair market value of that transaction in US dollars on the date of the transaction and do the valuation in a reasonable manner that is reliably applied. Using an active market would be ideal. The active market for virtual currency is those markets in which virtual currency is traded, such as Binance. The prices from the fair market mean the actual rates of virtual currency in the active market of virtual currency.
  • If the market value of property received against the conversion of Cryptocurrency exceeds the taxpayer’s adjusted cost basis of Cryptocurrency, it will generate the taxable gain. The taxpayer should record the loss if the active market value of virtual currencies decreases and is less than the adjusted basis of the virtual currency.
  • The character of the loss and gain depends on the Cryptocurrency transaction and the way you are dealing with it and could be determined as either a capital asset or business asset for the taxpayer. The taxpayer records the capital gain or loss on the exchange or sale of virtual currency that is recorded as the capital asset. Other properties are held for sale or inventory; an asset that is not capital will be treated as business income or loss.
  • There are also tax implications for cryptocurrency minors when minors successfully mine the virtual currency. The virtual currency’s active market value on the date the transaction occurred is included in the taxpayer’s gross income.
  • Suppose a taxpayer performs the mining transaction of virtual currency as a business or trade, and the taxpayer is not an employee of any organization. In that case, the net earnings from the mining activities will be considered self-employed income. The net earnings is usually calculated on business or trade less allowable trade expenses. So, the individual mining can deduct all of his deductible expenses from the gross mining revenue to calculate the mining taxable income. The deductible expenses are those allowable for a taxpayer to operate his business. The expenses are pure business expenses and are reasonable rather than the personal expenses of the minor.
  • A payment made by Cryptocurrency is subject to reporting to a similar extent as any other compensation earned on the property. I.e., a person using virtual currency in his business and making a payment in virtual currency, and its market value in the US $600 or more, in a tax period must report that payment to the payee and IRS on form 1099. These payments include the fixed expenses of the business and determinable income such as compensation, annuities, premiums, wages, salaries, rent, etc., paid in cryptocurrencies.
  • Typically, a taxpayer in the course of trade or business makes a payment of $600 or more during a taxable period to a contractor or self-employed person against the performance of services required to report the payee and IRS on the form 1099 MISC (Miscellaneous income). The payment of Cryptocurrency will be reported on Form 1099 MISC. The value of the virtual currency should be the fair market value of the money in US dollars as of the date of payment.

Cryptocurrency or virtual currency is yet new to the world. There are many tax issues that are yet to be clarified. We are watching this closely with all IRS recent and future publications and will bring those to you in a summary form as soon as we can.


RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters.

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.


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