Currently, there are more than 20,000 cryptocurrencies in circulation from Bitcoin, Ethereum, Tether, Cardano, Solana, Polkadot, Avalanche, Polygon, Litecoin, Chainlink, to Uniswap.

This week, we’ll cover taxation of cryptocurrencies.

According to the IRS, cryptocurrencies are taxable by law just like any other property and are required to be reported on your tax returns. In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938PDF, explaining that cryptocurrencies are treated as property for Federal income tax purposes.

Transactions involving cryptocurrencies must be reported in US tax dollars, meaning the taxpayer will be required to determine the fair market value of virtual currency in US dollars as of the date of payment or receipt.

If the fair market value of property received in exchange for cryptocurrencies exceeds the taxpayer's adjusted basis, the taxpayer has a taxable gain. They experience a taxable loss when the value of the property received is less than the adjusted basis of the cryptocurrency.

The type of gain or loss depends on whether the cryptocurrency is considered a capital asset; stocks, bonds, or other investment property are generally capital assets. A cryptocurrency that doesn't meet the above definition would realize an ordinary gain or loss on the sale or exchange.

If you held the cryptocurrencies for one year or less before selling or exchanging, then you will have a short-term gain or loss. If you held them for more than one year before selling or exchanging, then you will have a long-term gain or loss.

The holding period begins on the day after you acquired the cryptocurrencies and ends on the day you sell. Your gain or loss will be the difference between your adjusted basis and the amount you received in exchange.

Any payment made using cryptocurrencies is subject to reporting to the IRS to the same extent as any other payment. If, for example, a person who during the course of trade or business makes payment with a value of $600 or more in cryptocurrencies, the transaction is to be reported to the IRS.

Payments made using cryptocurrencies are subject to backup withholding to the same extent as any other.

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