Cryptocurrencies, like Bitcoin, Ethereum, and Litecoin, are on the rise. Though the theory of cryptocurrency existed long before Bitcoin, the larger global awareness of cryptocurrencies began in 2008 with Satoshi Nakamoto and the paper Bitcoin – A Peer to Peer Electronic Cash System. Since then, cryptocurrencies have continued to gain popularity and global acceptance. According to CoinMarketCap.com, there were over 2000 cryptocurrencies with a total market cap of over $160 billion (as of April 2, 2019).
But what is cryptocurrency? According to Merriam-Webster, cryptocurrency is "any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions". The architecture of cryptocurrency includes blockchain, timestamping, and mining. Summed up by Wikipedia, "Within a cryptocurrency system, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme."
In recent years, various federal agencies have released guidelines related to cryptocurrencies. In 2014, the IRS issued Notice 2014-21, "IRS Virtual Currency Guidance". This Notice describes how existing general tax principles apply to transactions using virtual currency. It uses Bitcoin as an example. The Frequently Asked Questions that are answered in the Notice include "How is virtual currency treated for federal tax purposes?", "How is the fair market value of virtual currency determined?", "Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?", "Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?", and more.
For those who have additional questions regarding the IRS guidelines on cryptocurrencies, BNA recently published Taxation of Cryptocurrencies as part of its Tax Management Portfolios. Written by Jim Calvin, a tax partner with Deloitte Tax LLP, this title provides an introduction to Bitcoin and cryptocurrencies, a breakdown of IRS Notice 2014-21, and information regarding trading and investing cryptocurrencies. It also describes potential cryptocurrency issues, including Bitcoin ownership, exchange of virtual currency for goods or services, realization of income from a chain split, qualified charitable contributions of Bitcoin, and losses sustained by individuals. Additional information, including the table of contents, is available on the publisher's website. This title, and all the BNA Tax Management Portfolios, is available in the library on our two Bloomberg Law computers.
Looking for more resources on the rise of cyprocurrencies and the possible legal implications? Take a look at the PBI Law's New ABC's: Artificial Intelligence, Blockchain & Cryptocurrency and the PLI Alternative Finance Summit 2018: Marketplace Lending, Cryptocurrency and Crowdfunding.