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Cryptocurrency - Understanding Virtual Currency and its Tax Implications

May 25, 2021


Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.

How is Virtual currency treated for Federal income tax purposes?
Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.  

For more information on the tax treatment of virtual currency, see the Internal Revenue Service (IRS) Notice 2014-21.

What is cryptocurrency?
Cryptocurrency is a type of virtual currency (i.e. Bitcoin, Ethereum, Litecoin, Dogecoin, etc.) that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.

  • a transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction
  • a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction

Will I recognize a financial gain or loss when I sell my virtual currency for real currency?
Yes. When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses.  

For more information on capital assets, capital gains, and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

For additional information on the tax consequences of virtual currency transactions see the Frequently Asked Questions on Virtual Currency Transactions page on the IRS website.