Taxation of Virtual Currency Transactions
This domain tests how virtual currency is taxed in the United States. The core rule is simple and drives most questions: virtual currency is property, so every disposition triggers gain or loss computed against basis.
Core rules
- IRS Notice 2014-21 treats convertible virtual currency as property; general tax principles apply.
- Basis is the fair market value when acquired. Holding period determines short-term versus long-term capital treatment.
- Selling, exchanging for another coin, or paying for goods or services is a disposition. Paying with appreciated coins produces gain.
- Mining and staking rewards are ordinary income at fair market value when received, if the taxpayer has dominion and control, per Rev. Rul. 2023-14.
- Rev. Rul. 2019-24 addresses hard forks and airdrops: receipt of new coins from an airdrop following a hard fork is ordinary income when the taxpayer gains dominion and control.
- Like-kind exchange treatment under section 1031 is limited to real property after the 2017 tax law; it does not apply to virtual currency.
Reporting
Gains and losses are reported on Form 8949 and Schedule D. Form 1040 asks a digital asset question. Brokers report on Form 1099-DA starting with 2025 transactions, furnished in 2026, with basis reporting phased in later - so taxpayers still need independent records.
Worked example
An investor buys 1 BTC for $30,000, later uses it to buy a $45,000 car when BTC trades at $45,000. The purchase is a disposition: $15,000 long-term or short-term gain depending on holding period. The dealer receives property worth $45,000 and must account for it separately.
Traps
- Believing no tax is due until funds convert to dollars.
- Applying section 1031 to coin-for-coin swaps.
- Ignoring income on staking rewards because the coins were not sold.