Frequently Asked Questions – North Carolina Bitcoin Lawyer
Q: How is cryptocurrency treated by the Internal Revenue Service?
A: Cryptocurrencies are currently considered property but the Internal Revenue Service. As such, general accounting and tax principles apply to cryptocurrency mining and transactions. The Interal Revenue Service’s definition of virtual currencies as property means that each time you or your corporation spends, trades, exchanges, gifts, donates, or loses any cryptocurrency that it is considered a taxable event.
Q: How is the fair market value (FMV) of cryptocurrency calculated?
A: Profits and losses from cryptocurrency transactions are required to be reported to the Internal Revenue Service in U.S. dollars. As such, it will be necessary to accurately and consistently calculate the fair market value of your holdings in U.S dollars at the time of the taxable event. It is important to utilize the same methodology of calculating your holdings. For example, picking one exchange located in China for the purposes and calculating profits while picking another in Zimbabwe for calculating losses is not advisable. There are several cryptocurrency services that aggregate prices from reputable exchanges and determine a cryptocurrency’s price by taking the volume weighted average of all prices reported at each market.
Q: Do I have any gains or losses when I exchange cryptocurrency for other property?
A: The simple answer is yes. If the fair market value of the other property is more than the basis of the cryptocurrency, you will have a reportable and taxable gain on that exchange. However, if the fair market value of the other property is not more than the basis of the cryptocurrency, you will have a reportable loss on that exchange.
Q: Are mined cryptocurrencies considered gross income when the coin or digital asset is realized?
A: Yes. When a cryptocurrency miner receives their block reward, token or coin, the fair market value of the cryptocurrency at the time of receipt is considered gross income.
Q: Can I pay my employee’s wages or compensation from their employment with cryptocurrency?
A: Yes. However, it is worth mentioning that payments to employees for services is considered wages by the Internal Revenue Service regardless of how those wages are paid. As such, payment of wages in cryptocurrency is subject to traditional federal and state withholdings. Effectively, this would be no different than paying an employee with any other property.
Q: Will I be penalized by the Internal Revenue Service for calculating prior years’ profits and losses in a manner that is inconsistent with the Internal Revenue Service’s currently guidelines?
A: You may face tax or other penalties for failing to comply with tax laws. It is important to note that