To calculate your gain or loss when you pay for services using virtual currency, you need to determine the difference between the fair market value (FMV) of the services you received and your adjusted basis in the virtual currency exchanged.
- Determine the Fair Market Value of Services Received: The FMV of the services is the value in U.S. dollars as of the date you received the services.
- Determine Your Adjusted Basis in the Virtual Currency: Your adjusted basis in the virtual currency is generally the amount you paid for it, adjusted for any previous transactions or events that may have affected its basis.
- Calculate the Gain or Loss: Subtract your adjusted basis in the virtual currency from the FMV of the services received. If the FMV of the services is greater than your adjusted basis in the virtual currency, you have a gain. If the FMV of the services is less than your adjusted basis, you have a loss.
Example Calculation:
- Suppose you paid for services worth $500 using virtual currency.
- Your adjusted basis in the virtual currency used for the payment is $300.
- Your gain would be $500 (FMV of services) - $300 (adjusted basis) = $200 gain.
- Conversely, if your adjusted basis was $600, you would have a loss of $100 ($500 - $600).
This gain or loss should be reported on your Federal income tax return in U.S. dollars. For more detailed information on gain or loss 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)
