Virtual Currencies

by Tom Andrews, CPA

I often find that yacht crewmembers are early adopters of technology, for example I remember yacht crew using mp3 players, phone texting, online banking, and skype before it was main stream. I suspect this has a lot to do with nature of the business, crewmembers are often traveling to Europe and Asia where these technologies are sometimes being used before they are widely accepted in the United States.  I also attribute it to the necessity of searching for any technology that can make life easier while a crew member are traveling.  The latest technology or some might call a fad that I see yacht crewmembers experimenting with is virtual currencies.  Some yacht crewmembers are purchasing it as an appreciable asset like some would a share of stock and others are using as a form of currency. Other crewmembers are using virtual currencies to pay for goods and services.

The most common form of digital currency is Bitcoin and if you had not heard of Bitcoin two years ago chances are you have heard about it now because of its dramatic rise in value. Over the past year I have had clients buy and sell virtual currency and there have been tax consequences.  One of the problems with virtual currencies is that some individuals believe that since it is not a tangible asset there should not be a tax consequence when the currencies are bought, sold or exchanged for goods and services.

One of the reasons digital currencies are attracting the attention of the IRS is that individuals are using bitcoin and other digital currencies to launder money or conceal income. As a result the IRS is now issuing high level guidance on how these currencies should be taxed.  The most common form of a digital currency transaction is the purchase and sale of the currency for a profit.  In this case you will be reporting the transaction as you would a capital asset or a share of stock, the transaction would be reported on your tax return as a “sale and other disposition of capital assets” on form 8949.

In addition to holding virtual currency as an asset I am also seeing individuals use these currency in a similar manner to how crewmembers were using foreign bank accounts years ago. For the longest time crewmembers would open a foreign bank account to conceal income from taxing authorities and now that foreign accounts are under increased scrutiny crewmembers are using the digital currency in a similar matter.  It should be noted that the IRS views digital currency in an offshore server the same way that they do as having a foreign bank account.

Despite the IRS issuing high level guidance on the use of virtual currencies there are still many issues that have been left unaddressed. Because the IRS is aggressively pursuing virtual currency account holders I recommend that if you are in possession of a virtual currency you notify you tax preparer in hopes you can identify disclosures that will need to be made to the IRS.

Skip to content