The popularity of cryptocurrency has been on the rise since its creation over a decade ago, but over the past two years increasing numbers of investors and miners have catapulted the burgeoning technology into the spotlight. If you are considering incorporating cryptocurrency into your financial strategy, make sure you understand the tax liability associated with cryptocurrency transactions and keep meticulous records to avoid costly errors in your federal tax return. Before you open that Bitcoin wallet, here are some basic tips on how cryptocurrency will affect your income taxes.

• Cryptocurrency is currently treated as property for the purposes of federal tax. While cryptocurrency is in some cases used as a medium of exchange similar to paper money such as the U.S. dollar, it is not designated as legal tender by the United States federal government. Any time you sell a virtual currency, the transaction is taxable based on the fair market value of the cryptocurrency on the date of the transaction. This also applies to the purchase of one cryptocurrency with another. Since such a transaction includes the sale of one cryptocurrency for another, the transaction is taxable.
  
  
• You may record a gain or loss:
• When using cryptocurrency to pay for property if your adjusted basis of the cryptocurrency on the date of exchange is greater or less than the fair market value of the property received.
• In the sale of cryptocurrency that is a capital asset. In most cases, cryptocurrency is held as a capital asset and thus you can harvest losses as you would with stocks and bonds.
  
  
• You owe taxes on all gains from cryptocurrency. Payments over $600 must be reported to the IRS by the payor. However, you may not always receive a Form 1099 from entities from whom you have received payments. In addition, regardless of whether it meets the $600 threshold, if you receive cryptocurrency as payment for goods or services these gains must be recorded in your computation of gross income. You will also owe taxes on the date of sale for any change in fair market value while your cryptocurrency was sitting in your wallet. Be sure to record all your cryptocurrency transactions including the fair market value in U.S. dollars on the date of the transactions for your personal records to avoid potential penalties after filing your taxes for unreported or incorrectly reported income.
  
  
• Mining virtual currency counts toward gross income. Just as receipt of cryptocurrency must be recorded in the fair market value on the date of purchase when received as payment, the same is true for the successful mining of cryptocurrency. Generally, this income is reported and taxed as self-employment income if you are mining the cryptocurrency for yourself. This does not apply if you are mining for a company as an employee.

If cryptocurrency interests you, make sure you have a complete understanding of the tax implications of each of the many uses of this new technology, and keep clear and accurate records throughout the year in preparation for your federal tax filing.