IRS Cryptocurrency Taxation: What you Need to Know in 2020

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

It’s been said that nothing is certain but death and taxes—so why should cryptocurrency be any different? Since the IRS’s first published cryptocurrency taxation guidance in 2014, tax professionals and taxpayers have struggled to understand their cryptocurrency reporting obligations. The IRS has since published a clarifying ruling and frequently asked questions to address a number of common cryptocurrency taxation issues. But as U.S. taxpayers increasingly adopt virtual currency and blockchain technology for both domestic and foreign transactions, questions continue to arise about cryptocurrency tax-reporting requirements.

Overview of IRS Cryptocurrency Taxation Rules and Requirements

Cryptocurrency is treated as property for federal tax purposes. The IRS treats cryptocurrency as it would any other property, and applies general principles of taxation to virtual assets. Taxpayers must, therefore, claim as gross income the fair market value of cryptocurrency received in exchange for goods or services. Fair market value is calculated as of the date of receipt of the cryptocurrency in U.S. Dollars.  Taxpayers should exercise care in valuing cryptocurrency, as we anticipate a number of future challenges with respect to crypto valuations.

The IRS also warns that taxpayers must report gains or losses associated with cryptocurrency exchanges and must recognize the fair market value of any successfully mined cryptocurrency as income. Professional miners may also be subject to self-employment taxation based on the net earnings of their cryptocurrency mining activities. Employees who are paid in virtual currency are subject to the same federal withholding requirements that would apply if they were paid in U.S. Dollars. Bitcoin and related virtual currency payments may be considered legal wages in the United States, the value of which is determined by the fair market value of bitcoin in U.S. Dollars at the time of payment.

The IRS warns that underreporting the value of cryptocurrency may result in tax and penalty liability. In fact, the IRS has stated that it is “actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations” in light of major cryptocurrency underreporting in 2019 and earlier years.

Recent IRS Cryptocurrency Taxation Guidance

Despite the IRS’s treatment of cryptocurrency as a traditional asset, virtual currency raises a number of unique questions. The IRS recently attempted to address some of the common cryptocurrency questions and concerns for the 2019/2020 tax year.  That guidance addresses the following topics (though readers should note that there appear to be a number of shortcomings in the IRS’s guidance and its apparent understanding of the underlying cryptocurrency transactions):

Establishing the value of off-chain virtual currency and calculating taxable gains and income after a hard fork often present complex federal tax issues that are best addressed by an experienced cryptocurrency taxation and exchange attorney, such as those at Freeman Law PLLC.


Cryptocurrency and Blockchain Attorneys 

Have Cryptocurrency or Blockchain issues or questions? Freeman Law is an innovative thought leader in the blockchain and cryptocurrency space. Blockchain and virtual currency activities take place in a rapidly evolving regulatory landscape. Freeman Law is dedicated to staying at the forefront as these emerging technologies continue to revolutionize social and economic activities. Contact Freeman Law to schedule a consultation or call (214) 984-3000 to discuss your cryptocurrency and blockchain technology concerns.