A November 2021 Pew Research Center survey indicates that 16% of Americans personally have invested in, traded, or otherwise used virtual currency. Additionally, the number of people investing in or engaging in transactions involving virtual currency continues to increase.
These statistics strongly suggest that tax preparers must be aware of the nature of virtual currency and its tax treatment. In this blog article we’ll cover the basics on virtual currency and the tax laws governing these types of transactions.
What is Virtual Currency?
Virtual currencies, like regular money, are designed to convey value. Individuals can use them to buy and sell; they can also be used as an investment option. Bitcoin, Ethereum, and Dogecoin are perhaps some of the best-known virtual currency options on the market, but there are hundreds of other options to pick from.
Even so, it is important to note there are several huge differences between virtual currencies and non-virtual ones. Virtual currencies are created by individuals and organizations; regular currencies are created by national governments. Regular currencies have coins and bills; virtual currencies do not. What's more, the virtual currency market is not regulated like other financial markets. This is attractive to many potential investors; however, it also comes with a heightened risk of loss due to fluctuating values and cyberattacks.
How do Transactions Involving Virtual Currencies Work?
The most common means of acquiring virtual currency is to buy it using cash from your bank account or an online platform such as PayPal. Cryptocurrency platforms sell multiple virtual currencies, you just need to create an account and a digital wallet to hold your new investment. PayPal allows users to buy and sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin on its platform.
Multiple businesses accept virtual currencies, although prices may fluctuate from day to day as virtual currencies can drastically rise or fall in value from one day to the next. However, you don't necessarily have to make purchases with your currency. You can also treat it as a long-term investment, waiting until the value rises to sell your tokens and turn a profit.
US Tax Laws Governing Virtual Currency Transactions
Before buying or using virtual currencies, it's important to understand the tax implications of doing so. The United States government may not consider virtual currencies to be on par with the United States Dollar and other currencies, but you will still be required to pay taxes on purchases made with a virtual currency.
What's more, the IRS treats virtual currency holdings as property, which means you'll need to pay taxes on any profits made when selling virtual currency holdings, even if these funds were lost in a subsequent reinvestment. Sellers will need to note the fair market value of the virtual currency they receive in exchange for goods and/or services, and list the income they receive via this medium along with gross earned income.
Become a Tax Expert on Virtual Currency Transactions
Virtual currencies can be a great investment opportunity for those who are willing to familiarize themselves with how the market works and do careful research before buying or selling any virtual currency holdings. Even so, those who get in on the market will need the help of tax professionals who are familiar with the virtual currency market to keep track of investments, purchases, and earnings, and file these properly to ensure there are no problems with the IRS. Savvy tax preparers can also offer advice on when to buy and sell in order to keep tax payments as low as possible while maximizing short and long-term profits.
As a tax professional or accounting professional, you can make sure you have the knowledge and advice to offer your clients by learning more about virtual currency transactions with WebCE. WebCE is excited to offer the online course Virtual Currency Transactions, designed for accountants and CPAs, Enrolled Agents (EAs), and other tax professionals. This course provides crucial information about virtual currency transactions and directs the tax preparer's approach to many issues associated with this growing area of the economy.