In this first of (we hope) many posts on the interesting and myriad tax issues arising in the world of cryptocurrency and blockchain technology, we focus on the very basic U.S. federal income tax consequences of cryptocurrency transactions. The following is a very high-level discussion of the consequences generally applicable to U.S. individual holders of cryptocurrencies, and will not be applicable to all taxpayers depending on their particular situation.
Is it property or is it money?
While it might seem an academic question, the distinction between property and currency is the key to the U.S. federal income taxation of cryptocurrencies. Gain on nonfunctional foreign currency exchanges (i.e., currencies other than the main currency used by a trade or business) is generally ordinary income, and therefore taxable under current law at marginal rates up to 39.6% (or 43.4%, factoring in the net investment income tax). In contrast, gain or loss on the sale of property can constitute either ordinary or capital income, depending on whether the property sold is or is not a capital asset. If a capital asset, the reduced long-term capital gains rate (up to 23.8% under current law, including the net investment income tax) could apply if the asset sold was held for more than one year.