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November 13, 2017


IRS and cryptocurrency: Is it property or currency?

The Internal Revenue Service (IRS) has a reputation for making tax matters difficult. Filling out tax forms is not an easy matter, but the agency has made matters even more difficult when it comes to cryptocurrency.

Why are tax matters for cryptocurrency so difficult? The biggest issue is the agency’s failure to clearly state if cryptocurrency is property or currency. The distinction is more than one of simple semantics. The classification as property or currency has direct tax implications. An owner of property in a foreign country, for example, generally does not need to report this property to the IRS. An owner of currency, in contrast, may need to report the asset.

It should seem fairly simple. In 2014, the IRS issued a notice that stated this asset was viewed as property. Thus, those with who invest in cryptocurrency should not need to report the asset. However, the language of the Foreign Account Tax Compliance Act (FATCA) causes difficulty. According to this law, foreign financial institutions are required to provide information about accounts held by United States taxpayers. This definition extends to include cryptocurrency exchanges as financial institutions.

This single portion alone seems a contradiction. It appears the owner of the cryptocurrency is not required to report the asset, the foreign financial institution holding the asset must report.

What is the answer? Report or not? Unfortunately, there is no simple answer to this tax issue. A recent publication by the CPA Practice Advisor recommends reporting the asset within tax Form 8938, the Statement of Specified Foreign Financial Assets. Currently, IRS guidance on how to handle cryptocurrency is lacking. As such, it is wise for those who are attempting to comply with tax laws regarding these assets seek legal counsel.