The IRS recently amended Notice 2014-21, which details the tax treatment of virtual currency, such as Bitcoin, as property for U.S. federal tax purposes.
Notice 2014-21 defines virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. This notice, 
released about nine years ago, also originally stated that such “digital currencies were not legal tender in any jurisdiction.” However, Bitcoin cryptocurrency is now recognized as legal tender in El Salvador, Panama, Paraguay and several other countries. So, the IRS modified the “Background” section of the notice to remove the statement in question.
FAQs unaffected
According to the IRS, this change doesn’t affect the answers to the frequently asked questions (FAQs) in Notice 2014-21, Section 4. This includes FAQ 2, which concludes that convertible virtual currency isn’t treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
FAQ 1 states that, “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” Meanwhile, FAQ 3 mandates that, “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” According to FAQ 5:
Fair market value
If a cryptocurrency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
The fact that Bitcoin is now recognized as legal tender in multiple countries demonstrates the continued interest in and widening popularity of virtual currency — now commonly referred to as “cryptocurrency” or more simply “crypto.” If you have questions about how crypto could affect your tax liability, contact the professionals at Sol Schwartz & Associates.
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