Bitcoin and several rival forms of cryptocurrency experienced record-breaking growth in recent years, leaving many investors and their CPAs grappling with uncertainty and surprise during tax season. Many returns were put on extension, awaiting further guidance from the IRS, while other taxpayers found themselves faced with an unexpectedly large tax bill as a result of misconceptions surrounding how these transactions are taxed.
Cryptocurrency is digital currency that uses encryption techniques, rather than a central bank, to generate, exchange, and transfer units of currency. Unlike cash transactions, no bank or government authority verifies the transfer of funds. Instead, these virtual transactions are recorded in a digitized public ledger called a “blockchain.” Individual units of the currency are called “coins.”
Introduced in 2009, Bitcoin was the first cryptocurrency and remains the most widely used. Other forms have grown tremendously in popularity since then, including Litecoin, Ethereum, and Ripple. While cryptocurrency exchanges have experienced booms and busts in the market, experts predict the use of cryptocurrency will continue to increase, making it imperative that CPAs are prepared to understand and educate their clients on the tax implications of these virtual transactions.