Blockchain, the technology that cryptocurrencies are built upon, has the potential to revolutionize large portions of the world’s economy. At its core, blockchain is a decentralized, distributed, and public digital ledger that provides a secure method to record transactions. Its distributed feature means that it is stored across many computers, limiting the ability of participants to alter the ledger while allowing participants to quickly and easily verify transactions. But the powerful technology that has spawned hundreds of cryptocurrencies, now worth billions of dollars, has spawned as many complex legal and tax issues.
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“I think it’s a technical tour de force.”
– Bill Gates, Founder of Microsoft
“You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.”
– John McAfee, Founder of McAfee
“I think it’s rat poison.”
– Charlie Munger, Vice Chairman of Berkshire Hathaway
Bitcoin may be digital, but it’s property as far as the IRS is concerned.
In 2014, the IRS released its first guidance on the taxation of virtual currencies. Rather than imposing new or special rules for the taxation of virtual currency, the IRS’s guidance provides that virtual currencies will be treated as property, and that general tax principles applicable to property transactions will apply to virtual currency transactions.
Miners, Traders, and HODLers have tax issues with their cryptocurrencies.
Because virtual currencies are treated as property for federal income tax purposes, every transaction involving a virtual currency is a potentially taxable transaction. Miners who have set up complex mining rigs to perform calculations (and heat their houses at the same time) will have taxable income equal to the fair market value of the mined virtual currency upon receipt of the virtual currency. Traders hoping to capitalize on the violent swings in virtual currency prices will also have taxable income on their trades. But HODLers (i.e., those who Hold On for Dear Life to their virtual currencies) may be able to avoid taxable income until they sell their virtual currencies. Strohmeyer Law can help each of these blockchain participants manage their tax and legal issues.