Cryptocurrency FAQ

Internal Revenue Service 

For purposes of the FAQs in this notice, the taxpayer’s functional currency is assumed to be the U.S. dollar, the taxpayer is  assumed to use the cash receipts and disbursements method of accounting and the taxpayer is assumed not to be under common control with any other party to a transaction.


Q-1:  How  is virtual currency  treated for federal tax purposes?

A-1:   For federal tax purposes,  virtual currency is treated  as property.  General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2:  Is virtual currency  treated as currency  for purposes of determining whether a transaction results in foreign currency  gain or loss  under U.S. federal tax laws?

A-2:   No.  Under currently applicable  law, virtual currency is not  treated as currency that could generate foreign currency gain or  loss for U.S. federal tax purposes.

Q-3:  Must a taxpayer who receives  virtual currency  as payment for goods or services include in computing gross income  the fair market value of the virtual currency?

A-3:   Yes.  A taxpayer who receives virtual  currency as payment for goods or services must, in computing gross income, include the fair market value of  the virtual currency, 3 measured in U.S. dollars, as of the date that the virtual currency was received.  See Publication 525,  Taxable and Nontaxable Income,  for more information on miscellaneous income from exchanges  involving property or services.

Q-4:  What is the  basis of virtual  currency  received as payment for goods or services in Q&A-3?

A-4:   The basis of virtual currency that a  taxpayer receives as payment for goods or services  in Q&A-3 is the fair market  value of the virtual currency  in U.S. dollars as of the date of receipt.  See Publication 551,  Basis of Assets,  for more information on the computation of basis when property is received for goods or services.

Q-5:   How is the fair market value of virtual currency  determined?

A-5:   For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars.  Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date  of payment or receipt.   If a virtual currency is listed on an exchange and the exchange rate  is established by market supply and demand, the fair market value  of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into  another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.     

Q-6:  Does a taxpayer have gain or loss  upon an exchange of virtual currency  for other property?

A-6:   Yes.  If the fair market value of property received in  exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.  The taxpayer has a loss if the fair  market value of the property received is less than the adjusted basis of  the virtual currency.   See Publication 544,  Sales and Other Dispositions of Assets, for information about  the tax treatment of sales and exchanges, such as whether a loss is deductible.

Q-7:  What type of gain  or loss does a taxpayer realize on the sale or exchange of virtual currency?

A-7:   The character of the gain or loss  generally depends on whether the virtual currency is a capital asset in the hands of  the taxpayer.  A taxpayer generally realizes capital gain or loss on the sale  or exchange of virtual currency  that is a capital asset in the hands of the taxpayer.   For example, stocks, bonds, and  other investment property are generally capital assets.    A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is  not a capital asset in the hands of the taxpayer.  Inventory and other property held mainly for sale to customers in a trade or 4 business are examples  of property that is not  a capital asset.  See Publication 544 for more information about capital assets and the character of gain or loss.

Q-8:  Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions  and maintain the public Bitcoin transaction ledger) realize gross income  upon receipt of the virtual currency resulting from those activities?

A-8:   Yes, when a taxpayer successfully “mines”  virtual currency, the fair market value of the virtual currency as of  the date of receipt is includible in gross  income.  See Publication 525,  Taxable and Nontaxable Income, for more information on taxable income.

Q-9:  Is an individual who “mines” virtual currency  as  a trade or business subject to self-employment tax on the income derived from those activities?

A-9:  If a taxpayer’s “mining” of  virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting  from those activities constitute selfemployment income and are subject to the  self-employment tax.  See Chapter 10 of Publication 334,  Tax Guide for Small Business, for  more information on selfemployment tax and Publication 535,  Business Expenses,  for more information on determining whether expenses are from a business activity carried on to make a profit.

Q-10:  Does virtual currency  received by  an independent contractor for performing services constitute self-employment income?

A-10:   Yes.  Generally, self-employment income  includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee.  Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and  is subject to the self-employment tax.  See FS-2007-18, April 2007,  Business or Hobby? Answer Has Implications for Deductions,  for information on determining whether  an activity is a business or  a hobby.

Q-11:  Does virtual currency  paid by  an  employer as  remuneration for services constitute wages for employment tax purposes?

A-11:   Yes.  Generally, the medium in which  remuneration for services is paid is immaterial to the determination of whether  the remuneration constitutes wages  for employment tax purposes.  Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions 5 Act (FICA) tax, and Federal  Unemployment Tax Act (FUTA) tax and must be reported on Form W-2,  Wage and Tax Statement.  See Publication 15 (Circular E),  Employer’s Tax Guide, for information on the withholding,  depositing, reporting, and paying of employment taxes.

Q-12:  Is a  payment made using virtual currency  subject to  information reporting?

A-12:   A payment made using virtual currency is  subject to information reporting to the same extent as any other payment made in  property.  For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency 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.  Examples  of payments of fixed and determinable income  include rent, salaries, wages, premiums, annuities, and compensation.   

Q-13:  Is a person who in the course  of a trade or business makes a payment using virtual currency  worth $600 or more  to an independent contractor for performing services required to file an  information return  with the IRS? 

A-13:   Generally, a person who in the course  of a trade or business  makes a payment of $600 or more in a taxable year to an  independent contractor for the performance of services is required to report that payment  to the IRS and to the payee on Form 1099MISC,  Miscellaneous Income.  Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair  market value of the virtual currency in U.S. dollars as of the  date of payment.  The payment  recipient may have income even if the recipient does not  receive a Form 1099-MISC.  See  the Instructions to Form 1099-MISC and the General Instructions for Certain Information  Returns for more information.  For payments to non-U.S. persons, see Publication 515,  Withholding of Tax on Nonresident Aliens and Foreign Entities.

Q-14:  Are payments made  using virtual currency  subject to backup withholding?

A-14:   Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property.  Therefore, payors making reportable payments using virtual currency  must solicit a taxpayer identification number (TIN) from 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 withholding is required.   See Publication 1281,  Backup Withholding for Missing and Incorrect Name/TINs,  for more information.

Q-15:  Are there IRS information reporting  requirements for a person who  settles payments made in virtual currency  on  behalf of merchants that accept virtual currency  from their customers? 6

A-15:   Yes, if certain requirements  are met.  In general, a third party that contracts with a substantial number of unrelated merchants  to settle payments between the merchants and their customers is a third party settlement organization (TPSO).  A TPSO is required to report payments made  to a merchant on a Form 1099-K,  Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the  merchant exceeds 200, and  (2) the gross amount of payments made to the merchant exceeds $20,000.  When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where   the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes.  When determining whether the transactions are reportable,  the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.   See The Third Party Information Reporting Center, , for  more  information on reporting transactions on Form 1099-K.

Q-16:  Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice  prior to March 25, 2014?

A-16:   Taxpayers may be subject to penalties for failure to comply with tax laws.  For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under  section 6662.  In addition, failure to timely or correctly report  virtual currency transactions when required to do so may be subject to information reporting penalties  under section 6721 and 6722.  However, penalty relief may be available to taxpayers  and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.   SECTION 5.  DRAFTING INFORMATION The principal author of this notice is Keith  A. Aqui of the Office of Associate Chief Counsel (Income Tax & Accounting).  For further information about  income tax issues addressed in this notice, please contact  Mr. Aqui at (202) 317-4718; for further information about employment tax issues addressed in this notice, please contact Mr. Neil D. Shepherd at (202) 317- 4774; for further information about information reporting issues addressed in this notice, please contact Ms. Adrienne E. Griffin at (202) 317- 6845; and for further information regarding foreign currency issues addressed in this notice, please contact Mr. Raymond J. Stahl at (202) 317-6938.  These are not toll-free calls.