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The IRS extensively regulates cryptocurrency transactions, making sure that the Government gets its “fair share” of cryptocurrency wealth. In 2014 the IRS promulgated a Notice explaining how general tax principals would apply to transactions using virtual currency. The IRS published principals in 2018 arising out of a nationwide tax forum on unique issues concerning bitcoin and cryptocurrency. While those are the most significant IRS pronouncements, IRS has added new complications each year.

Tax consequences occur whenever cryptocurrency is used as a medium of exchange, such as selling cryptocurrency for US dollars, exchanging one cryptocurrency for another, or paying for goods and services with cryptocurrency. 

The IRS has focused its attention on non-fungible tokens, or NFT’s. An NFT is a token created on a blockchain that proves you are they only owner of that one-of-a-kind digital item. “NFT’s” are bought and sold in digital marketplaces. The specific tax implications of a particular NFT depend on whether the taxpayer is an “NFT” creator or investor, as well as whether the taxpayer’s interactions with the NFT are as a hobby or as a business. 

If the IRS determines the taxpayer is a hobbyist under their convoluted rules, IRS will count all gain as income. But deny the hobbyist the ability to deduct his expenses related to the transaction. 

Selling an NFT for cryptocurrency or exchanging it for another NFT is also a taxable event. Additionally, Art based NFT’s are classified as collectibles for tax purposes. When NFT’s are sold, gains or losses will depend on how long the taxpayer held the NFT. When a taxpayer trades cryptocurrency or spends it to buy something, those transactions are subject to capital gains taxes, as according to IRS, the taxpayer is selling a capital asset. There are complex rules as to how gains or losses are treated. There are also technical rules as to how much cryptocurrency trading loss (assuming all gains are offset) can be deducted from ordinary taxable income.  If you receive virtual currency as payment for services whether cryptocurrency or tokens, the value of the virtual currency in U.S. dollars at the time received will be imputed to you as income. 

Whether you invest in cryptocurrency or earned crypto currency as income, it is becoming more likely that such transactions will be reported to IRS. The IRS will expect you to report your cryptocurrency transaction and pay any taxes owed. 

If you are contemplating selling or exchanging cryptocurrency or entering into a transaction in which you will be paid in cryptocurrency, you should obtain the services of an experienced tax attorney. Your attorney can advise you how to structure the transaction so as to lawfully minimize your tax liability, The Weinberg Law Firm is ready to assist you. 

Don’t let the IRS make your life a living nightmare! Call:
Broward 954-763-3890
W. Palm Beach 561-355-0901

WAGING GUERRILLA WARFARE FOR YOU!! Mr. Weinberg is licensed to practice before the United States Tax Court WITH MORE THAN 30 YEARS OF LEGAL EXPERIENCE.