@marketingmonk in this episode of the cryptoverse, while discussing the US tax ramifications of running a Dash Masternode, you asked a question about the tax treatment of spending cryptocurrencies to purchase goods directly. The question revolved around whether or not spending Dash on two video games would trigger capital gains/(loss) tax. The short answer is yes it would.

Back in 2013, when Bitcoin surged to $1,200 per coin, traders and miners in the United States were looking to the IRS for guidance on the tax treatment of Bitcoin. On March 25, 2014, the IRS released Notice IR-2014-36 IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for US Federal Tax Purposes; General Rules for Property Transactions Apply which provided a broad set of guidelines and answers to 16 questions about the tax treatment of virtual convertible currencies (cryptocurrencies) when mined, sold and spent.

Before answering your question about capital gains tax, it is important to know, the IRS designated virtual convertible currencies to have tax treatment as property, rather than currency (see Q-1 and A-1 in the linked document provided). As a result, each time the coin is exchanged or sold, the basis of that coin would have to be subtracted from the sale price and the capital gain realized at the time the coin is spent must be calculated and reported.

For example, imagine I have 1 Dash which I paid 70 USD to purchase. That 70 USD is now my basis (capital Investment) into Dash. When selling or exchanging that Dash, I have to have my capital investment returned (basis) before I can begin to recognize a taxable capital gain.

Now imagine I use this 1 Dash to purchase two video games for the agreed price of 50 USD each The calculation is as follows:

2 Video Games Combined Cost (100 USD) - 1 Dash Basis (70 USD) = 30 USD Capital Gain to Report on Income Taxes

What if the basis in the Dash I paid with is higher than the cost of the video games? I would report a capital loss on my income tax documents instead and possibly receive a deduction.

I touched on the subject of tax implications of with a blog I authored about about four months ago US Tax Considerations – Tax Guidelines for Mining Cryptocurrencies (Bitcoin, Ethereum, STEEM, etc.). It goes into much greater detail if you're interested.