Cryptocurrency is treated like any other investment asset for federal income tax purposes and not "money." Therefore, taxpayers that sell cryptocurrency for a gain incur taxable capital gains for income tax purposes.
It is likely that a fair amount of cryptocurrency has been sold for gain by U.S. taxpayers without that being reported - either out of ignorance or intentional tax avoidance. Importantly, cryptocurrency transactions are not invisible but are available for review on the blockchain. Some sleuthing may be required to tie a particular transaction to a taxpayer, but this is often not that difficult. Further, cryptocurrency exchanges may be able to identify crypto transactions and tie them to specific persons.
Taxpayers with gains in the past or present years should note Operation Hidden Treasure, which was recently revealed by IRS personnel. This is an IRS program focused on taxpayers who omit cryptocurrency income from their tax returns, and is comprised of agents trained in crypto and virtual currency tracking. Civil and criminal enforcement elements of the IRS are involved.
The IRS also updated its Frequently Asked Questions on Virtual Currency Transactions on March 2. This can be accessed at https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.
One interesting change in the FAQ relates to whether the mere purchase of virtual currency must be reported on a taxpayer's Form 1040 pursuant to the new question that asked whether the taxpayer was involved in any virtual currency transaction during the year. The question itself strongly suggests that the answer is 'yes.' However, the FAQ says 'no.' Here is the question and answer:
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