Buying and Selling with Virtual Currency

There are many services that can now be paid for with virtual currency, so it is important to understand the tax implication of buying and selling in cryptocurrency. The IRS has put together a list of frequently asked questions on the topic:

Do I have income if I provide someone with a service and that person pays me with virtual currency?

Yes.  When you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income. 

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

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.

How do I calculate my income if I provide a service and receive payment in virtual currency?

The amount of income you must recognize is the fair market value of the virtual currency, in U.S. dollars, when received.  In an on-chain transaction you receive the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.

Will I recognize a gain or loss if I pay someone with virtual currency for providing me with a service?

Yes.  If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss. 

How do I calculate my gain or loss when I pay for services using virtual currency?

Your gain or loss is the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.   

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