In-Kind Contributions – Virtual Currencies

With the boom of virtual currencies over that past few years, practitioners are seeing an increase in the number of questions relating to the taxation of these investments. One very common question asked by current and potential virtual currency fund managers: Can my investors and I contribute appreciated virtual currency assets into my pooled investment partnership/hedge fund tax deferred?

While virtual currencies are thought of by many as cash or currency, they are in fact viewed by the Internal Revenue Service more similarly to securities (specifically property) and are therefore generally subject to capital gain/loss tax treatment. In 2014, the IRS issued Notice 2014-21, which addressed the tax treatment of Bitcoin and other virtual currency transactions. In the notice, the IRS concluded that Bitcoin and other virtual currencies are to be treated as property for tax purposes, and as such, general tax principles associated with the sale or exchange of property apply to all virtual currencies. It is also specifically noted that virtual currency is not defined as “foreign currency” for tax purposes.

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