Nicholas Frey

Virtual currency has gained popularity in recent years as a means of conducting transactions online. The Internal Revenue Service (IRS) has provided guidance on how virtual currency is taxed. In this article, we will explore the difference between virtual currency and cryptocurrency, and the tax consequences of blockchain forking.

Virtual Currency vs. Cryptocurrency:

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Virtual currency can be used to purchase goods or services and can be exchanged for fiat currency. Examples of virtual currency include Bitcoin, Litecoin, and Dogecoin.
Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions and control the creation of new units. Cryptocurrencies are decentralized, meaning they are not controlled by a central authority, such as a government or financial institution. Examples of cryptocurrencies include Bitcoin, Ethereum, and Ripple.

Taxation of Virtual Currency:

The IRS treats virtual currency as property for tax purposes. This means that any gains or losses from the sale or exchange of virtual currency are subject to capital gains tax. If you hold virtual currency as an investment, any gains or losses are considered capital gains or losses. If you use virtual currency to pay for goods or services, any gain or loss from the exchange is considered ordinary income or loss.
When you receive virtual currency as payment for goods or services, the fair market value of the virtual currency at the time of receipt is included in your gross income. This value must be reported on your tax return. If you mine virtual currency, the fair market value of the virtual currency at the time you receive it is included in your gross income.

Tax Consequences of Blockchain Forking:

A blockchain fork occurs when a cryptocurrency undergoes a significant protocol change that results in two or more versions of the blockchain. This can occur due to a software update, a disagreement among users, or other reasons.

If you own cryptocurrency that is subject to a blockchain fork, the tax consequences will depend on whether you receive new cryptocurrency as a result of the fork. If you receive a new cryptocurrency, the fair market value of the new cryptocurrency at the time of receipt is included in your gross income. This value must be reported on your tax return. If you do not receive new cryptocurrency, there is no tax consequence.

In conclusion, virtual currency is taxed as property by the IRS, and any gains or losses are subject to capital gains tax. Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions and control the creation of new units. A blockchain fork can result in a new cryptocurrency, which is subject to income tax if received. It is important to consult a tax professional for guidance on how to properly report virtual currency transactions on your tax return.