OHIO — Digital assets could have an impact on your hard assets come tax time. 

Even though cryptocurrencies aren’t backed by the government, that doesn’t mean the IRS doesn’t need to know about them. 

“Even though it has the term ‘cryptocurrency’ or ‘virtual currency,’ that’s kind of a misnomer,” said Cynthia Pedersen, tax director for Cohen & Company. 

She said the IRS considers digital currencies to be property. If you just purchase some and hold onto it, she said there’s nothing to be taxed. 

“It’s like buying any other piece of property,” Pedersen said. “It’s as if you bought like a plain baseball card or a T-shirt or something like that.”

But, if you sell a digital asset, transfer it into a different type of cryptocurrency or accept it as a form of payment, she said you’ll need to make detailed records of when the transaction happened because of the market’s volatility to prove the actual amount of gain or loss. 

If you don’t, it could end up costing you more if you’re audited.

“The IRS can take the position that you have zero basis and make you pick up a larger gain than you should’ve actually had if you had had substantiation,” Pedersen said. 

Digital currency transactions aren’t anonymous. They’re tracked on a blockchain which is a public record the IRS has access to.

Pedersen said tax rules and investing can be complex, so don’t be afraid to reach out to professionals for guidance. 

“There’s good actors and bad actors in every investment and that’s true for cryptocurrency, as well,” she said. “So, you just want to make sure that you are protecting yourself and making good choices when you do enter into this space.”