How do I calculate my gain or loss when I exchange my virtual currency for other property

To calculate your gain or loss when you exchange your virtual currency for other property, you need to determine the difference between the fair market value of the property you received and your adjusted basis in the virtual currency exchanged.

1. Fair Market Value of Property Received: This is the value of the property you receive in exchange for your virtual currency, measured in U.S. dollars as of the date of the exchange. If the property received is another virtual currency, the fair market value is determined by converting the virtual currency into U.S. dollars at the exchange rate on the date of the transaction.
2. Adjusted Basis in Virtual Currency Exchanged: This is generally the amount you originally paid for the virtual currency, adjusted for any subsequent transactions or events that affect its basis. For example, if you received the virtual currency as payment for goods or services, your basis would be the fair market value of the virtual currency at the time you received it.
3. Calculation of Gain or Loss: Subtract your adjusted basis in the virtual currency from the fair market value of the property received. If the fair market value of the property received exceeds your adjusted basis in the virtual currency, you have a gain. If the fair market value is less than your adjusted basis, you have a loss.

For example:

• If you exchange virtual currency with an adjusted basis of $1,000 for property with a fair market value of $1,500, you have a gain of $500.
• Conversely, if you exchange virtual currency with an adjusted basis of $1,000 for property with a fair market value of $800, you have a loss of $200.

The character of the gain or loss (capital or ordinary) depends on whether the virtual currency is a capital asset in your hands. If the virtual currency is held as a capital asset, the gain or loss will be capital. If it is not a capital asset, the gain or loss will be ordinary.

For more detailed information on gains and losses from sales or exchanges, you can refer to IRS Publication 544, "Sales and Other Dispositions of Assets."

Sources:
Notice 2014-21
Rev. Rul. 2019-24