If you spend or invest in virtual currencies, it is crucial to understand how virtual currency transactions are treated for tax purposes.
IRS Notice 2014-21
The IRS addressed the taxation of virtual currency transactions in Notice 2014-21. According to the Notice, virtual currency is treated as property for federal tax purposes. This means that, depending on the taxpayer's circumstances, cryptocurrencies, such as Bitcoin, can be classified as business property, investment property, or personal property. General tax principles applicable to property transactions must be applied to exchanges of cryptocurrencies. Hence, Notice 2014-21 holds that taxpayers recognize gain or loss on the exchange of cryptocurrency for other property. Accordingly, gain or loss is recognized every time that Bitcoin is used to purchase goods or services.
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