What is cryptocurrency?
Cryptocurrency is a medium of exchange, which provides:
- A common unit of value, so things with differing values can be traded without needing to barter
- A way to put a value on something intangible, like a service, and
- A means of storing holding value
National governments typically have backed only their own fiat currency. Increasingly, governments are adopting CBDCs (see the Glossary of cryptocurrency terms section: fiat currency, CBDC).
Note: The IRS treats cryptocurrencies as properties for tax purposes.
All cryptocurrencies reside within a blockchain ecosystem, and can never reside anywhere else, like in a bank account. Contrast this with an online banking system’s money, which can be converted into hard currency and back, via ATM machines or bank tellers. A blockchain recordkeeping system has some potential benefits over a conventional central database regarding security, autonomy (meaning few or no intermediaries), transparency, and community consensus.
Because cryptocurrency exists only in electronic format, it is a digital currency governed by rules determined entirely by consensus among a virtual (online) community's members. For example, bitcoin resides on the Bitcoin blockchain and ethereum resides on the Ethereum Classic blockchain. In practical terms, virtual currency and digital currency are used interchangeably.
Common cryptocurrency concepts and terms
This diagram may help to clarify some of the terms used with cryptocurrency and digital assets.
How is cryptocurrency taxed?
Note: In this section, for simplicity, the term “cryptocurrency” is used as a catch-all for cryptocurrency, digital currency, virtual currency, tokens, NFT’s, digital assets. For more info on these and other terms, see the section covering Digital Assets. For information on “digital assets” for IRS federal tax purposes, see Digital Assets.
Depending on the situation, cryptocurrency is taxed as:
- Ordinary income, if for example, it earns a return for the holder from an income stream (similar to interest) or
- A capital gain or loss from a sale of property after its value has increased or decreased
- If merely bought and held, it’s not taxed until something is done with it, such as disposal
See the sections that follow for answers to common questions around cryptocurrency and how it is taxed.
How do I enter cryptocurrency in TurboTax?
Intelligent Tax Optimization (ITO) is a crypto aggregator within the TurboTax application. It helps make cryptocurrency tax filing easier.
ITO is able to:
- Connect to exchanges and wallets, and import transactions and tax forms
- Identify taxable transactions
- Calculate the cost basis values for transactions
- Make remediation (filling any information gaps) easier
Here are some articles that will help you enter your crypto transactions in TurboTax:
- How do I enter my crypto in TurboTax?
- What crypto transaction types does TurboTax support?
- How do I upload a CSV file of my crypto transactions?
- How do I create a CSV file for an unsupported crypto source?
- How do I report cryptocurrency as a capital gain?
- How do I connect with a cryptocurrency specialized tax expert in TurboTax Online?