Your tax professional will ask you if you own, buy or sell cryptocurrency. The IRS wants to know too and now the question appears on the front page of the 2021 Form 1040! Cryptocurrency is a virtual currency that is quickly gaining widespread acceptance throughout the world.
The IRS treats cryptocurrency as property like a capital asset which is subject to gain or loss on exchange or sale. You are required to keep track of the basis just like a stock purchase. The definition of virtual currency is a “digital representation of value”. You will hear or read about names of cryptocurrency such as: Bitcoin, Ethereum, Dogecoin, Cardano, XRP just to name a few. Each example has a monetary value.
There are utility applications to assist you in keeping track of the basis which is so important at tax time when your tax professional need to report any transactions from a transfer or sale.
If this sounds complicated, it is! We recommend that before you invest in cryptocurrency, do your research. Like any financial investment, you need to understand how cryptocurrency works and whether it is a good investment for you.
For more information, see the IRS FAQ page about cryptocurrency.