Separating Myth And Reality Of How Cryptocurrencies Are Taxed And RegulatedSurfing the web for information on how cryptocurrencies are taxed and regulated can lead to some mystifying and conflicting information. With the IRS and SEC starting to turn attention to the cryptocurrency industry, it is important to have accurate facts. The following are some of the more popular questions I have received from clients seeking clarity on various tax and regulatory matters regarding the taxation and regulation of cryptocurrencies.

Cryptocurrency is treated as a currency for tax purposes: False.

According to IRS Notice 2014-21, for federal tax purposes, cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. The character of the gain or loss associated with the cryptocurrency investment generally depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of cryptocurrency that is a capital asset in the hands of the taxpayer. For example, stocks, real estate, and other investment property are typically capital assets. Whereas, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that is not a capital asset in the hands of the taxpayer, such as business income from mining or other business activities.

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