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

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

1. Determine the Fair Market Value (FMV) of the Virtual Currency: The FMV of the virtual currency is generally measured at the time the transaction is recorded on the distributed ledger. This value should be converted into U.S. dollars.
2. Identify Your Adjusted Basis in the Property Exchanged: The adjusted basis is typically the original cost of the property, adjusted for factors such as depreciation, improvements, and other adjustments as specified in the tax code.
3. Calculate the Gain or Loss: Subtract your adjusted basis in the property from the FMV of the virtual currency received. The formula is:
   [
   \text{Gain or Loss} = \text{FMV of Virtual Currency} - \text{Adjusted Basis of Property}
   ]
4. Characterize the Gain or Loss:
   • If the property exchanged is a capital asset (e.g., stocks, bonds, personal property held for investment), the gain or loss will be a capital gain or loss.
   • If the property is not a capital asset (e.g., inventory, property used in a trade or business), the gain or loss will be ordinary.

Example Calculation:

• Suppose you exchange a piece of equipment (not a capital asset) with an adjusted basis of $1,000 for virtual currency worth $1,500 at the time of the exchange.
• Your gain would be:
  [
  \text{Gain} = $1,500 (\text{FMV of Virtual Currency}) - $1,000 (\text{Adjusted Basis}) = $500
  ]
• This $500 gain would be recognized as ordinary income because the equipment is not a capital asset.

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

Sources:
Notice 2014-21
Rev. Rul. 2019-24
Publication 544 (2023)