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Virtual currency, or cryptocurrency, is a digital representation of value that can be exchanged for goods and services or held for investment. These currencies include Bitcoin, Litecoin, Ethereum and many others. For Bitcoin, if a taxpayer "mines" the virtual currency, it needs to be included in gross income at the fair market value upon receipt or discovery of the currency. The character of the income depends on the intended purpose of the currency. 

Sales of virtual currency can result in capital gains or losses if the currency is treated as property held as an investment. If the currency is held as inventory or other property for sale to customers, the gain or loss is treated as ordinary. To calculate any gains or losses, one must determine the basis of the currency first, which is the cost of acquisition (assuming it was purchased), or fair market value or the trading value on the day of receipt (assuming it was acquired as part of an exchange). 

When these currencies are used to pay employees or independent contractors, the taxpayer needs to be aware of the proper documentation that needs to be filed annually with the IRS such as W-2s or 1099s. 

For more information, please contact your UHY Advisors tax professional in one of our many locations.