From taxation to securities, the ownership and sale of Bitcoin and other cryptocurrency is subject to a complex patchwork of federal laws. Tax, securities, commodities and anti-money laundering regulations may apply to those who engage in cryptocurrency transactions as a consumer, business enterprise or investor. This article provides an understanding of the regulatory structure and obligations arising from transactions involving virtual currency.

Tax Regulation

The IRS considers “virtual currency,” such as Bitcoin, ethereum tokens and other cryptocurrency, as “property” for tax purposes, with taxes owed if there is any realized gain on sale. For an individual filing a federal income tax return, the gains or losses from a sale of virtual currency that was held as a “capital asset” (i.e., for investment purposes) are reported on (1) Schedule D of IRS Form 1040 and (2) IRS Form 8949 (Sales and Other Dispositions of Capital Assets).

The IRS requires, on Form 8949, for each virtual currency transaction, that the following information be disclosed: (1) a description of the amount and type of virtual currency sold; (2) the date acquired; (3) the date the virtual currency was sold; (4) the amount of proceeds from the sale; (5) the cost (or other basis); and (6) the amount of the gain or loss. It should be noted that the recordkeeping requirements of IRS Form 8949 can be particularly onerous for those who have used cryptocurrency to make numerous small purchases of goods or services throughout the year.

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The ABCs of Electronic Currencies

Blockchain technology has the tech and business sectors abuzz. Legislators, regulators and the judiciary struggle to keep up with the breakneck pace of development. Much of the initial focus has been on Bitcoin, the virtual currency that was the first major blockchain-based application, but interest and activity by both industry and policymakers is quickly shifting toward broader uses of blockchains. Although blockchains’ possibilities are exciting, the uncertainty and instability surrounding many blockchain applications, certainly including cryptocurrencies, is likely to result in significant distressed scenarios requiring specialized knowledge of both this extraordinary technology and insolvency law.