Cryptocurrency Tax.pdf

Virtual currency, also known as cryptocurrency, is a digital representation of value that functions as a medium of exchange, unit of account, and store of value. It is not legal tender, not backed by a central government or bank, and is decentralized and global. Cryptocurrency utilizes cryptography to secure transactions recorded on a distributed ledger, such as a blockchain. For federal income tax purposes, transactions using virtual currency must be reported in US dollars, and the fair market value (FMV) of virtual currency received must be determined. Virtual currency is treated as property, and gain or loss is the difference between the FMV of the product or service and the cost basis in the virtual currency. Mining virtual currency, such as through blockchain transactions, results in gross income upon receipt of the digital token, and is subject to self-employment tax if part of a trade or business. Hard forks, airdrops, and constructive receipt of virtual currency also have tax implications, and tax reporting for virtual currency purchases and exchanges is required, with transactions reported on Form 8949 and Schedule D (Form 1040).