To determine the fair market value (FMV) of cryptocurrency received in exchange for property or services when the cryptocurrency does not have a published value, you should use the FMV of the property or services exchanged for the cryptocurrency at the time the transaction occurs.
Here is the legal reasoning and rationale behind this determination:
- IRS Guidance on Virtual Currency: According to IRS FAQ Q28, when you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, the FMV of the cryptocurrency received is equal to the FMV of the property or services exchanged for the cryptocurrency when the transaction occurs.
- Basis in Virtual Currency: As per IRS FAQ Q13, if you receive virtual currency in exchange for services provided, your basis in that virtual currency is the FMV of the virtual currency in U.S. dollars at the time it is received. This principle can be extended to property as well, where the FMV of the property exchanged will determine the basis.
- General Tax Principles: The IRS Notice 2014-21 clarifies that for federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Therefore, the FMV of the property or services exchanged for the cryptocurrency will be used to determine the FMV of the cryptocurrency received.
- Publication 551: According to IRS Publication 551, the basis of property received for services is the FMV of the property at the time of receipt. This aligns with the guidance that the FMV of the property or services exchanged will determine the FMV of the cryptocurrency received.
In summary, to determine the FMV of cryptocurrency received in exchange for property or services when the cryptocurrency does not have a published value, you should use the FMV of the property or services exchanged at the time of the transaction. This approach ensures that the value of the cryptocurrency is accurately reflected based on the value of what was exchanged for it.
Sources:
Notice 2014-21
Rev. Rul. 2019-24
Publication 551 (12/2022)
IRS Proposed Regulations REG-122793-19
