Determining basis when you have been paid in virtual currency

If you have been paid for services in virtual currency, this payment is generally recognized as ordinary income and should be reported on your tax return. It is important to be able to understand how to determine basis, gains and losses to help ensure accurate reporting. The IRS has compiled several frequently asked questions about basis, gain and losses in virtual currency received for services.

Q. How do I determine my basis in virtual currency I receive for services I’ve provided?

A: If, as part of an arm’s length transaction, you provided someone with services and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received.

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

A: 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. 

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

A: 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.