{ Taxation | Cryptocurrency }
How the IRS is dealing with this virtual conundrum
W
hen Bitcoin started in 2009, a single “coin” was nearly worthless. It subsequently reached parity with the U.S. dollar and rose to a high near $20,000 in 2017 before plummeting again. In 2020, to stave off economic disaster due to the pandemic, By Robert B. governments around the world Teuber, JD poured money into their economies, creating potential financial insecurity in the value of their currencies. Amidst that uncertainty, investors turned to virtual currencies. By October 2020, the value of a single Bitcoin had again risen to over $16,000, and it peaked five months later at nearly $60,000 before settling in the mid-$40,000s in late summer 2021. While the long-term viability of cryptocurrencies is up for debate, it is clear that they have become mainstream. Bitcoin, Ethereum, Litecoin, Dogecoin and others all are working to
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claim their place in the market. Many legitimate investors now view the currencies as a diversifying part of their portfolios, and many major corporations accept Bitcoin as payment. The IRS has had their eye on the use of virtual currencies for some time, but with the increased popularity comes greater scrutiny.
What is a cryptocurrency? The terms “digital currency,” “virtual currency” and “cryptocurrency” are often used interchangeably. However, technically they are not the same thing. Digital currency describes any electronic currency and includes virtual currencies and cryptocurrencies. The existing IRS guidance speaks in terms of virtual currencies and defines the term as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” The IRS is clear in distinguishing virtual currencies from “real currency.” A cryptocurrency is a type of virtual currency that uses algorithms and cryptography to validate and secure transactions that are digitally recorded on a blockchain ledger. Because of the secrecy provided by the cryptography, the government is committing substantial resources to tracking and identifying transactions and owners.
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