If you spend any amount of time scrolling through your news feed, then you’ve likely stumbled across headlines extolling the rapid growth of virtual currency. In the last few years virtual currencies like Bitcoin, Dash, and Zcash have become increasingly popular. The rise of these cryptocurrencies brings a host of questions: What exactly are cryptocurrencies? Who regulates them? Are they taxable? Will they last?
A cryptocurrency is a digital/virtual currency that uses cryptography for security. This makes the currency difficult to counterfeit, though it is still susceptible to attacks from hackers. Most virtual currency is stored in the cloud or on computers and is transferred via mobile apps.
These digital currencies are not tied to any country or central authority, which means they are not subject to regulations or government interference. Cryptocurrencies have gained traction because they grant the user anonymity and the ability to avoid transaction fees.
Cryptocurrencies, especially Bitcoin, have been steadily increasing in value as more and more people purchase and exchange it.
So how does the IRS deal with virtual currencies? In 2014, they announced that convertible virtual currency will be treated as property for tax purposes. In their announcement, they stated that “the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” Their full list of Frequently Asked Questions on this topic can be found here
If you, or your business, use virtual currency make sure you are in compliance with the IRS.
Although virtual currency can provide freedom to its users, it’s future is shrouded in uncertainty. The lack of central authority provides flexibility, but also promises instability. Before you or your business begin exchanging one of these virtual currencies, it would be wise to schedule a meeting with a trusted financial advisor to discuss the benefits and risks to you.
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