A byte of the virtual currency market that is… If you haven’t heard about the recent regulation regarding virtual currency, or better yet if you have any virtual currencies…keep reading. On October 9, 2019, the IRS released additional guidance surrounding virtual currencies. Specifically tax treatment of a cryptocurrency hardfork and holding the currency as a capital asset.

Accounting for Virtual Currency Gains

I’m going to let you in on a little secret, ok it’s not really a secret, but definitely something you should know. All and I mean ALL gains on virtual currency are subject to taxation.

Now that’s out of the way, we can proceed accordingly.

The next phase is determining the gain and the tax rate associated with such gain.

Determining Gain

Let’s say you purchased 10 bitcoins for $50,000.

Now let’s say 5 month later you sell all 10 bitcoins for $100,000 (crazy ROI!). You my friend have a $50,000 gain, and the IRS wants a piece of that.

In the example above, the investment was held for 5 months, and so it will be taxed as ordinary income at graduated tax rates. However, if you held this investment for 1 year or more, the gain is considered a long term capital gain taxed at lower rates. 0, 15%, or 20% depending on income level. Most taxpayers will be taxed no higher than 15%.

Accounting for Hardforks

Ok, so now we should have a bit of clarity on how capital gains work. Let’s spice it up a bit!

Cryptocurrencies such as Bitcoin, Litecoin, and Ethereum, may experience a hardfork. A hardfork is essentially a split. Why is this important? Well because the split results in additional currency that the IRS now considers to be taxable income.

Let’s say you had 10 Bitcoins, and then a hardfork occurs resulting in you having 20 Bitcoins. The value of the additional 10 bitcoins at the time of the hardfork, is considered taxable income.

If you have questions regarding the new regulation, please feel free to reach out or drop a comment below.