What exactly is cryptocurrency? Money? Software?
Well, cryptocurrency IS money, albeit VIRTUAL MONEY. That means cryptocurrency exists ONLY in the digital world of clouds and virtual (not real) reality. As more fully explained by Kate Ashford in her article in Forbes magazine, cryptocurrencies represent alternative forms of payment relying on “cryptographic proof” rather than mutual trust and government support.
But unlike “paper” money, many transactions using cryptocurrencies can create a tax liability, that is, you may owe Uncle Sam taxes for using cryptocurrencies.
In her article for The Tax Adviser, Cynthia Pedersen, J.D., LL.M describes the difference for tax purposes between fiat currency (dollars, pesos, etc) and cryptocurrency; the latter being considered “property” rather than currency for tax purposes. And this difference is big at tax time.
Being considered property for tax purposes means that when you use cryptocurrency to “pay” for goods and services, or when you decide to exchange one cryptocurrency for another (say Bitcoin for Ethereum) you may have to pay a tax for any increase in the value of the cryptocurrency from the date when you bought it originally. Paying with cash, check or credit card you never have to worry about taxes.
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