Cryptocurrency is digital currency, or a "digital representation of value," as the IRS puts it. You can't see it, hold it in your hand, or put it in your wallet. It's been in use for more than a decade and has grown in popularity over the last few years. Instead of using a bank to create, transfer, and exchange funds, cryptocurrency employs a distributed and encrypted blockchain network to process transactions. No bank or government authority controls it, as they do with traditional currencies. So, if you have used cryptocurrency this year, what are the implications for when you file your taxes?
Let's first make sure we're on the same page when it comes to this new kind of money. Cryptocurrency units are referred to as coins, even though there's no physical coin. You store coins in a digital wallet or use an exchange or brokerage. A few of the major exchange and brokerage providers are Binance, Coinbase, Kraken, and Toro.
Bitcoin was the first cryptocurrency—we have a whole feature on how to buy, sell, and manage it—and it remains the most popular. It's been joined by Ethereum, Litecoin, and Dogecoin, among others. Cryptocurrency can be used to pay for goods or services, as an investment, or simply to exchange funds with someone else, whether for different cryptocurrencies or traditional currency. Transactions are recorded in an anonymized blockchain, which can be thought of as a digitized public ledger.
For the purpose of your taxes, the dollar value of the cryptocurrency at the time of the transaction is treated as either 1099 income or in the case of you receiving it as payment from an employer, W-2 income.
This form of money is still in its infancy, so don't expect to use it for all your online shopping, though many
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