Wednesday, January 29, 2020

Virtual Currency

Virtual Currency

Under Notice 2014-21, virtual currency such as Bitcoin is considered property for federal tax purposes; it is recognized as a capital gain or loss on the sale. If virtual currency is received for performing services, your clients would recognize ordinary income equal to the fair market value of the virtual currency.
Newly issued Revenue Ruling 2019-24 established the following rules:
  • Cryptocurrency: A type of virtual currency where the transactions are digitally recorded on a distributed ledger, such as blockchain.
  • Hard fork: A protocol change and results in a permanent diversion. A new cryptocurrency and new distributed ledger are created, in addition to the legacy system. However, the taxpayer does not receive income in a hard fork alone.
  • Airdrop: Cryptocurrency units are dispersed to the distributed ledger addresses of multiple taxpayers. This results in income to taxpayers, since they receive new currency.
Example: Taxpayer owns 100 units of Crypto A. Crypto A experiences a "hard fork" and Crypto B is created. 50 units of Crypto B are "airdropped" to the taxpayer. The taxpayer must report ordinary income equal to the fair market value of Crypto B.
Source: D'Avolio, Mike, CPA, JD, cpapracticeadvisor.com, 12/05/2019

1 comment:

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