Crypto-currency is digital currency, or a “digital value representation,” as the Internal Revenue Service (IRS) puts it. You can’t see it, hold it or put it in your wallet. It has been in use for more than a decade, and has grown in popularity in recent years. Cryptocurrency employs a distributed, encrypted blockchain network to process transactions instead of using a bank to create, transfer, and exchange funds. No bank or governmental authority controls it, just as traditional currencies do. So the question arises, is cryptocurrency taxable?

A Cryptocurrency Primer

First of all, let’s make sure we ‘re all on the same page when this new kind of money comes up. Cryptocurrency units are called coins although there is no physical coin. You store coins in a digital wallet, or you use a brokerage or exchange. These include major providers such as Coinbase, Kraken, Binance and Jaxx. Bitcoin was the first cryptocurrency and it remains the most popular among others, though it was joined by Ethereum and Litecoin. Cryptocurrency may be used to pay for goods or services, to invest, or simply to exchange funds with another. They can also exchange the coins for traditional currency. Cryptocurrency transactions are recorded in an anonymised blockchain that can be considered as a digitized public ledger.

This form of money is still in its infancy, so don’t expect to use it for online shopping, though it has been accepted by some vendors. It’s pretty popular among online gambling sites and with it you might even buy a Lamborghini. Some employers have also started to pay employees with it; at the time of the transaction the dollar value of the cryptocurrency is treated as W-2 or 1099 revenue. The mechanics of using cryptocurrency are often as simple as scanning a QR code or copying and pasting a long ID, but what happens in the background is much more involved than your typical bank transaction, since the transaction has to be verified by lots of distributed servers, rather than one bank or exchange.

Cryptocurrency considered as Property

If you used cryptocurrency but did not pay taxes on its related transactions, then you are not alone. Also, you don’t comply with IRS regulations, which might catch up with you someday. You may be penalised by the agency unless you can prove “reasonable cause.” Please note this is applied in the US.

The IRS has been considering cryptocurrency as a property since 2014. Taxpayers are required to report on their tax returns transactions involving virtual currency as US dollars, meaning that they have to determine their fair market value as of the date of the transaction. You can determine fair market value by converting the virtual currency into US dollars or another currency which can then be converted into US dollars (this assumes the exchange rate of the currency is determined by the supply and demand of the market).

From the place it stands, if you plan on using cryptocurrency, you need to do some seriously precise bookkeeping in US.

Additionally, it is good to know that there are certain countries that do not tax on cryptocurrency such as Malaysia, Singapore, Malta, Germany, Portugal, Switzerland and Belarus. Of course, for some of the countries, there are conditions to the ruling and some have not come up with a ruling for it yet.