The document discusses the IRS's guidance on the tax treatment of bitcoin and other virtual currencies. Some key points: - The IRS treats virtual currency as property, so general tax rules for property transactions apply. This means mining or receiving bitcoin as income requires reporting the fair market value as gross income. Selling or exchanging bitcoin triggers capital gains/losses taxes. - Tax treatment depends on how the bitcoin was acquired. Purchasing has no tax consequences until sale. Mining requires reporting fair market value as income. Receiving bitcoin for goods/services also requires reporting fair market value as income. - Record keeping for transactions is important to determine cost basis and calculate capital gains/losses. Form 8949 is

1. Bitcoin and The IRS
MICHELLE LI / SEPTEMBER 21 2017

2. MICHELLE LI, CPA
• Corporate Income Tax
Compliance at KPMG
and Andersen Tax
• Indirect Tax Team
@Airbnb

3. • IRS definition of virtual currency
• Tax treatment of common virtual currency transactions
• Present Landscape and Future Outlook
• Questions
Overview

4. IRS DEFINITION

5. • Brief FAQ of 16 questions
• Provides definition of virtual currency and tax treatment of virtual
currencies
• Defines taxable events related to mining, sales or exchange, and
receipts of cryptocurrency
• Only provides guidance on Federal tax implications; state
implications are separate issues
IRSNotice2014-21
CURRENT IRS GUIDANCE

6. • “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of
account, and/or a store of value.”
• It may behave similar to “real” fiat currency in some environments, but it does not have any legal tender
status in any jurisdiction.
• “Convertible Virtual Currency” are those virtual currency that have an equivalent value in real currency or
behaves as a substitute for real currency.
• Bitcoin is considered to be a Convertible Virtual Currency
VirtualCurrencyDefined

7. • Virtual currency is not legal tender; US law does not treat it as a currency, and therefore does not recognize
any foreign exchange gain or loss.
• For Federal tax purposes, virtual currency is treated as property; all general rules that apply to property will
apply to virtual currency, including basis determination and gain/loss characterization.
• Similar treatment to buying/selling stock
• The IRS is only concerned about cryptocurrency as income and sale or exchange of property; purchasing
cryptocurrency does not create a taxable event.
VirtualCurrencyistreatedasPropertyforFederalTaxPurposes

8. TAX TREATMENT OF
TRANSACTIONS

9. TaxTreatmentDependsonHowYouAcquiredyourBitcoin
Method of
Acquiring
Currency
Income
Treatment
Basis
Fair Market Value
(FMV)
Gain or Loss
Treatment upon
Sale or Exchange
Purchasing currency None to purchaser
Cost = FMV on date of
receipt
FMV in USD determined by
rate of exchange on date of
purchase
Capital vs. Ordinary
Depends on asset type in
hands of taxpayer
Receipt as payment
for goods or service
Gross Income
Cost = FMV on date of
receipt
FMV in USD determined by
rate of exchange on date of
receipt
Capital vs. Ordinary
Depends on asset type in
hands of taxpayer
Mining
Depends on mining activity
(for a company vs. self-
employment vs. hobby)
Cost = FMV on date of
receipt
FMV in USD determined by
rate of exchange on date
that mining is complete
Depends on mining activity
(for a company vs. self-
employment vs. hobby)

10. • If you receive virtual currency as payment for goods or services you must recognize and include the FMV
of the Bitcoin on the date of receipt as part of your gross income.
• If you receive virtual currency as payment for services rendered as an independent contractor, the FMV
of the currency is included in your gross income and constitutes self-employment income, therefore subject
to self employment tax.
• If you receive virtual currency as payment for services rendered as an employee, the FMV of the
currency is included in your gross income. Federal income tax withholding, such as FICA (Federal Insurance
Contributions) and FUTA (Federal Unemployment Tax), will apply to the FMV value of the currency on date
of receipt.
ReceiptofVirtualCurrencyforGoodsorServices=Income

11. • High fluctuations in exchange rates from coin to fiat affects an individual’s economic value in relation to
virtual currencies, especially those received as payment.
• Regardless of a coin’s depreciation or appreciation after date of receipt, individuals need to report the FMV
on date of receipt in gross income and pay taxes on that gross income
• Individuals could end up paying taxes on a higher income amount without realizing the same economic value
from the payment (if the coin depreciates after receipt of income, individuals will lose value).
• Alternatively, individuals could end up paying lower income tax if the coin appreciates after the receipt of
income.
VolatilityRisk:Taxliabilitymaynotalignwitheconomicvalueofcoins

12. • Individuals who mine currencies must include the FMV of the virtual currency as of the date of mining
completion in gross income.
• Individuals who mine currencies as their trade or business are subject to Self Employment tax on gross
income from mined currencies. However, in this scenario, individuals may be allowed to deduct business
expenses incurred from business activity (such as electricity, hardware, etc).
• Follow IRS guidance to determine whether or not mining activities constitute a trade or business or a hobby.
The IRS generally rules business activity to be hobbies if the activity has not generated a profit in at least 3
out of the 5 prior years.
MiningVirtualCurrencies

13. • Record the fair market value (purchase price) on date of purchase
• No taxable event occurs upon purchase, only when sold or
exchanged.
• If you purchase and just hold currencies, any reporting and
compliance burden will decrease since you’re not creating any
taxable transactions.
BuyingBitcoin

14. • Mining: Record the fair market value of the coin on the date of
successful mining. Use the date’s exchange rate as FMV. This
becomes your coin’s basis.
• Include the coin’s basis as part of your gross income.
MiningBitcoin

15. • Purchase: record FMV of currency on date of purchase. This is
the currency’s basis.
• Sale: record date of sale and selling price. This is a taxable event.
Calculate the gain/loss by subtracting Basis-Selling Price.
• If the sale occurs within one year or less, all gains are taxed at the
ordinary income rate.
• If the sale occurs beyond one year, all gains are taxed at the long
term capital gains rate.
• If you have a net capital loss, you can apply up to $1,500 (single)
or $3,000 (joint) against any capital gains.
TradingBitcoin

16. OrdinaryIncomeRatesvs.LongTermCapitalGainRates
Tax Brackets (Ordinary/STCG Rates) Long Term Capital Gains Rate
10% 0%
15% 0%
25% 15%
28% 15%
33% 15%
35% 15%
39.6% 20%
Holding onto coins for over one year can significantly reduce capital gains taxes.

17. Form8949:ReportingTradingActivity
The form has sections for reporting short-term and long-term sale activity.

18. FUTURE OUTLOOK

19. • No official guidance from the IRS
• Utility tokens or securities?
• The company may view ICO as a financing event, but if the IRS
does not view utility tokens as securities, this could give rise to a
taxable transaction.
• Potential taxable event: when Bitcoins are exchanged for tokens
• Recognize the gain/loss between Bitcoin’s basis (FMV on date of
receipt) and current FMV.
ICOs

20. • IRS vs. Coinbase John Doe Summons
• Ongoing investigation into those who transacted with Bitcoin from 2013-2015 with transaction values of
$20,000 or more.
• Coinbase still required to submit substantial information: “NOW LIMITED TO: name, address, tax
identification number, date of birth, account opening records, copies of passport or driver’s license, all
wallet addresses, and all public keys for all accounts/wallets/vaults.”
• Cryptocurrency Tax Fairness Act (filed Sept 7, 2017)
• If passed, will create a de minimis threshold so that if the cumulative amount of cryptocurrency
transactions within 1 year fall below $600, no capital gains liability will be triggered.
• Treasury Inspector General for Tax Administration Audit Report (Sept 2016)
• The IRS has not taken any concrete action to further develop guidance on virtual currencies, particularly
in the area of documentation requirements and tax treatments for various uses of virtual currencies.
WhereAreWein2017?

21. • Increase actions to educate taxpayers about virtual currency tax compliance
• Address issues such as 1) burden of record keeping of transactions when virtual currency = property, 2)
keeping track of cost and payments related to mining, 3) treatment of virtual currencies related to retirement
accounts or charitable contributions
• Revise third-party information reporting documents to facilitate identification of virtual currency reporting
(such as 1099-MISC, 1099-K, W-2)
While the IRS has agreed that the recommendations are reasonable, the IRS has also claimed limited resources
and competing funding/legislative priorities as factors that may prevent them from immediate action related to
virtual currencies.
RecommendationsfromtheTIGTAAuditReport

22. • How does the IRS know if I have Bitcoin?
• What about exchange of bitcoin for altcoins?
• What kinds of records do I need to keep if I’m an active trader?
• Can I use Section 1031 to defer gains if I exchange Bitcoin for altcoins?
• What exchange rate should be used to calculate fair market value? (Valuation methods)
• Do capital gains/losses need to be reported for all of my transactions?
• If the price of Bitcoin drops below the FMV on date of gross income receipt, can I write off a loss?
• If a coin is not easily exchangeable into a fiat currency, are they taxable on sale or exchange?
• How to keep track of costs and payments related to mining, especially if mining resources are pooled?
Questions