W. H. Brock and Associates, Ltd.

Professional home of Bill Brock: business consultant, tax professional, author.

Cryptocurrency & Federal Income Taxes

How the heck does the IRS tax Bitcoin, Ethereum, Litecoin, or any of the ICO new kids on the block? IRS has been largely silent since Notice 2014-21, which remains the primary guidance for the taxation of cryptocurrency transactions ("virtual currency" in IRS-speak).

This is a informal introduction, not professional guidance.

General Painful Observation

Sorry, US citizens and permanent residents are subject to taxes on worldwide income.

If your income is sourced to the fictitious nation of Freedonia, you will generally be subject to Freedonian income taxes.  (Whether your income is US-source or foreign-source may be determined by the US-Freedonian income tax treaty.)  You will generally receive a credit for foreign taxes paid to Freedonia in the USA, to the extent that the US rate is higher than the Freedonian rate. But if you've paid 10% to Freedonia and your Federal marginal rate is 39.6%, then (speaking very roughly) you'll probably owe 29.6% to the Feds.

Again, sorry about that.

Mining is Ordinary Income and is Subject to Self-Employment Taxes

The fair market value of cryptocurrency mined on the date of its mining is business income; the related ordinary and necessary business expenses are business expenses. 

Gains and Losses on Cryptocurrency Trades

As a rule of thumb, these gains and losses are similar in most respects to gains and losses on sales of securities. Day traders in particular should note that the wash sale rules apply.

Like-Kind Exchanges?

Are Section 1031 exchanges of one "convertible virtual currency" for another permissible? As of September 2017, I believe that they may be in certain cases. (Folks who have been trading between BTC and ETH may be particularly interested in this possibility.)

In any case, it's clear that all realized gains on exchanges of cryptocurrency must be reported on one's tax return, even if these gains are not recognized (that is, one takes the position that one does not need to pay tax on these gains).