Cryptocurrency has received a lot of attention recently, as Bitcoin (BTC) and Ethereum (ETH) establish themselves as viable assets for investors and a reliable alternative payment method for merchants and consumers. With this newly emerged market, holders of cryptocurrencies are faced with the additional uncertainty regarding their federal tax reports to the Internal Revenue Service (IRS). The classification and treatment of property is a top priority when filing taxes with the IRS. Therefore, taxpayers need to ensure the accuracy of their documents when submitting their reports.
    In response to taxpayers’ needs, the IRS published Notice 2014-21. Here, general rules for cryptocurrencies are provided to give taxpayers guidance when determining the classification and treatment of their cryptocurrencies. First, the IRS explains cryptocurrency, also referred to as “virtual currency” or “convertible virtual currency,” is treated as property for federal tax purposes. As such, general tax principles applied to traditional property transactions will be applied to transactions using cryptocurrencies. The IRS explains cryptocurrency is not currency that could be treated as a real currency because it does not meet the requirements of traditional real currencies. Specifically, despite operating similar to real currency as a means for transacting, cryptocurrency does not have legal tender status in any jurisdiction.
    Next, the IRS provides guidance for taxpayers whom receive cryptocurrency as payment for goods or services. Taxpayers whom meet this criterion shall, when computing their gross income, include the fair market value of the cryptocurrency, expressed in U. S. dollars, as the date the cryptocurrency payment was received. When determining the fair market value of the cryptocurrency, taxpayers are to convert the value of the cryptocurrency into U.S. dollars at the exchange rate, in a reasonable manner that is consistently applied.
    The IRS continues with providing the reporting requirements for payments using virtual currency. Here, the IRS states payment made using cryptocurrency is subject to the traditional reporting requirements used for any other payment made in property. To clarify this exchange and its respective reporting requirements the IRS provides an example, “a person who in the course of a trade or business makes a payment of fixed and determinable income using (cryptocurrency) with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee.” Furthermore, examples of fixed and determinable income include rent, salaries, and annuities. Following this, the IRS states payments made using cryptocurrency are subject to backup withholding just as other payments made in property. This requires the person making payment, known as the “payor,” whom make reportable payments using cryptocurrency, to solicit a taxpayer identification number (TIN) from the person receiving the payment, known as the “payee.” The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup holding is required.
    As cryptocurrency continues to develop and become more utilized by the market, it is important that taxpayers stay up to date with the tax requirements associated with this exciting and new technology.

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