Three Key Federal Income Tax Issues Raised By Cryptocurrencies

BACKGROUND

Cryptocurrencies – the original, and most famous of which, Bitcoin, was "designed" in 2009 by Satoshi Nakamoto (a pseudonym) – give rise to a number of tax issues, three of which we discuss in this article: (1) the effect of using Bitcoin to buy a good or service, (2) the treatment of mining Bitcoins, and (3) what happens from a tax perspective when there is a so-called hard fork of a cryptocurrency into two cryptocurrencies.

In simple terms, a cryptocurrency (also referred to as "virtual currency" in IRS publications) is "a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets" (emphasis added).1 Although we focus on Bitcoin in this article, there are many cryptocurrencies, such as Ether, Ether Classic, Litecoin and Bitcoin Cash.