Do you pay virtual currency tax in the US?

Yes! If you live in the U.S. and are involved in trading or investing in cryptocurrencies, any income you gain, known as capital gains, are subject to virtual currency tax. 

Virtual currencies, such as cryptocurrencies, have similar value to real currencies.

This article explains  virtual currency, its tax consequences, and where to get more information. 

According to the IRS – “Virtual currency transactions are taxable by law just like transactions involving any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.” 

Virtual currency – Definition and tax consequences 

What is virtual currency? 

A virtual currency is a digital representation of value that serves as a means of trade, a unit of account, and a store of value. It functions in some situations like “real” currency (i.e., U.S. or foreign coin and paper money designated as legal tender, circulates, and is commonly used and recognized as a medium of exchange in the country of issuance). Still, it does not have legal tender status in the U.S. Cryptocurrency is a virtual currency that uses cryptography to validate and protect transactions on a distributed ledger, such as a blockchain.

Virtual currencies, such as cryptocurrencies, have similar value to real currencies. It can serve as a substitute for real currency, also known as “convertible” virtual currency. For instance, bitcoin owners can digitally trade coins between users. Owners can also purchase coins using any currency or exchange them into different currencies, such as U.S. dollars or Euros. 

What are the virtual currency tax consequences? 

Any action involved in the selling, trading, or exchanging of virtual currencies to pay for goods or services and investments may result in tax liability. 

The Internal Revenue Service (IRS) issued IRS Notice 2014-21, IRB 2014-16, providing guidance for individuals and corporations on the tax treatment of virtual currency transactions.

Individuals who have bitcoin as a capital asset but are not in the trade or business of selling cryptocurrency might find answers in the IRS’s Frequently Asked Questions on Virtual Currency Transactions.

Where to get more reliable information? 

You can access the IRS website on virtual currency to find the latest information. On the website, you’d be able to find frequently asked questions and related documents on virtual currency and taxes. 

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