Russia is set to become the world’s first country to issue state-backed virtual currency – the CryptoRuble. In Russia, the measure aims to both curtail the misuse of virtual currencies for illegal activities and bring virtual transactions under the tax net, but for the rest of the world, it is another sign that cryptocurrencies are becoming increasingly important in everyday life.
If you’ve heard of Bitcoin (or Ethereum, Zcash, or a number of others) but don’t completely understand how it applies to you, some basic accounting principles can help explain how cryptocurrencies and traditional currencies might interact.
While the United States does not have its own virtual currency, the IRS did issue guidelines on calculating taxes on Bitcoin transactions. According to those guidelines, bitcoins or any other virtual currency are considered “property." This means if you buy a pizza in the US using bitcoins, you'll need to calculate the capital gain or loss on the transaction and pay taxes accordingly.
So how does one go about calculating capital gains? Let's use a basic example:
| Date | Activity |
|---|---|
| Oct 15 | Rich buys 10 bitcoins for $10 each |
| Oct 17 | Rich buys 10 bitcoins for $20 each |
| Oct 17 | Now Rich has 20 bitcoins in his e-wallet |
| Oct 18 | Rich buys a pizza worth $15 |
| Oct 18 | One bitcoin is worth $15 |
