IRS Position on Cryptocurrencies

The IRS determined that because cryptocurrencies, like bitcoin, are not issued by a sovereign, bitcoin and its brethren are not currency.  The IRS holds that cryptocurrencies are personal property in much the same manner as owning shares of stock in Amazon or Ford Motor Company.   Therefore, the IRS treats cryptocurrencies as a capital asset, subject to either short-term or long-term capital gains and losses.

Each time you acquire cryptocurrency, much like buying stock on one of the markets, you are establishing your basis in the cryptocurrency.  Additionally, you establish the holding period for the cryptocurrency on the date you acquire it.

Moreover, each time you trade cryptocurrency or purchase a good or service with a cryptocurrency, you are engaged in a disposition of that capital asset.  Depending on the length of time you held the cryptocurrency just disposed, you may have created a short-term gain subject to taxation at your ordinary income tax rate or you may have created a long-term gain subject to the current long-term capital gain tax rates.

Finally, if you engage in multiple cryptocurrency transactions a week, you will be required to track purchase date, cost basis, disposition date and disposition value for dozens or hundreds of cryptocurrency transactions a year in order to report the transactions on your Form 1040 individual income tax returns for each particular year.