Article written by:
Danny Keller
Tax Staff
The Internal Revenue Service recently released updated guidelines on the tax consequences of using virtual currencies in transactions. The IRS defines a virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but it does not have legal tender status in the U.S.” This broad definition covers all of the popular virtual currency options that can be exchanged for value in an established currency. Popular virtual currencies include traditional cryptocurrencies such as Bitcoin and Ether, but also include more niche offerings like Roblox and V-Bucks. Using virtual currencies can add a layer of tax complexity to everyday transactions.
Many sellers on sites such as Facebook Marketplace and Craigslist accept Bitcoin or Ether as payment. If you were to trade Bitcoin for a car, that transaction would be classified as a taxable event where you would recognize gain or loss on Bitcoin you traded away. For example, let us say that you buy a car listed on Craigslist for 1 Bitcoin (approximately $9,160 as of this writing), and you bought that Bitcoin for $8,160. For tax purposes, you would have to recognize a capital gain of $1,000. A gain must be recognized because the IRS views bitcoin as a capital asset and not as currency. As with all gains or losses, the IRS requires that you keep documents to support the amount of income reported. On the other side of the transaction, the seller of the car may have to recognize income for the value of the Bitcoin received for the car.
One interesting thing to note about the IRS guidance is that they explicitly include both V-Bucks and Robux as examples of virtual currencies. Both V-Bucks and Robux are virtual currencies that are used within hugely popular video games (Fortnite and Roblox, respectively). The inclusion of these in-game currencies is likely targeted at developers or streamers who are making and selling in-game goods in exchange for virtual currency. For example, Roblox offers the ability to earn in-game currency by selling virtual items. Depending on the situation, the seller of these virtual goods may have to recognize taxable income from these transactions.
The surge in virtual currencies’ popularity has caused the IRS to take notice and dedicate resources toward addressing potential non-compliance of taxpayers who transact in virtual currencies.
As discussed above, transactions involving virtual currencies add a layer of complexity to tax reporting. If you would like to learn more about how virtual currencies may impact your tax situation, please contact your GBQ professional for more information.
