Sign up for our weekly MasterSnacks courses here: https://www.citrincooperman.com/infocus/mastersnacks MasterSnacks, our C-Suite Snacks spin-off, brings you a series of topic-specific courses, using our snack-sized sessions to go in depth on content important to you. Join MasterSnacks live every Wednesday at noon for live exclusive sessions. The recent cryptocurrency bull market has attracted many new retail and institutional investors. With this transformational technology, there are tax considerations related to every transaction. During this MasterSnacks: Cryptocurrency session, we covered: • Taxation of digital assets • Unusual tax situations for crypto assets (forks, airdrops, securities, etc.) • Tax tips related to cryptocurrency to save time and money

1. Taxes on Bitcoin
and Digital Assets
April 28, 2021 | MasterSnacks Webinar Series

2. Welcome &
Introduction
PETER GOODRICH, CPA
Manager
Citrin Cooperman
pgoodrich@citrincooperman.com
212-697-1000

3. Form 1040 – Internal Revenue Service (IRS)

4. Cryptocurrency
and the IRS
• Internal Revenue Bulletin 2014-16, Notice 2014-21
• Explains existing general tax principles and their
applications to virtual currency
• Q&A format
• Virtual currency that has a fiat value and functions
as a medium of exchange is defined as convertible
virtual currency
• Virtual currency is treated as property, not currency

5. Common scenario (the “HODL’er”)
• I purchased cryptocurrency with fiat but had no other virtual currency transactions
during the year. Do I have to answer yes to the Form 1040 question?
• No, not required to answer yes.
Form 1040 Question Revisited

6. Nontaxable Transactions
Purchase crypto with fiat and hold
the assets (unrealized gain/loss)
Transfers between your owned
wallets (like a bank transfer)
Keep in mind network fees on transfers

7. • Sale of crypto for fiat
• Consideration of FIFO, specific identification
(LIFO, other)
• Exchange of crypto
• Purchase of goods or services using crypto
• Consider W-2 and 1099 reporting requirements
• Mining income
• Staking
• Yield farming
• Fork / Airdrop
• Other
Taxable
Transactions

8. Sale Of Crypto For Fiat
Scenario 1
• X purchases 1 bitcoin (BTC) for $1,000 USD
• X then sells the 1 bitcoin for $2,000 USD
Holding period of the crypto asset will determine short-term or long-term capital gain treatment
Sales price 2,000
$
Purchase price 1,000
$
Capital gain 1,000
$

9. Exchange of Crypto
Scenario 2
• X purchases fractional bitcoin (BTC) with 1 ether (ETH)
• Assumptions
• 1 ETH originally acquired with $1,000 USD
• ETH price at time of exchange for fractional bitcoin $2,500
Holding period of the crypto asset will determine short-term or long-term capital gain treatment
Sales price 2,500
$
Purchase price 1,000
$
Capital gain 1,500
$

10. Purchase of a Tesla
Scenario 3
• X purchases Tesla with bitcoin (BTC)
• Assumptions
• BTC cost basis $1,000
• Tesla purchase price $74,000
Holding period of the crypto asset will determine short-term or long-term capital gain treatment
Tesla MSRP 74,000
$
BTC purchase price 1,000
$
Capital gain 73,000
$

11. Earn crypto through validating block
transactions on the blockchain
through proof-of-work protocols
Block rewards from crypto mining is
considered ordinary income at the
instant the coin is created and valued
at the transactions fair market value
If the mining activity rises to the level of
a trade or business, the net earnings
are subject to self-employment tax
Crypto Mining

12. Staking
• Participation in a proof-of-stake protocol and validate
transactions on the network via nodes
• Deposit specific cryptocurrency into such nodes
• Rewarded for the validation of blocks on the
blockchain
• Ordinary income tax implications on the block
rewards received
• Proof-of-stake protocols require additional clarity from
the IRS, however, strong parallels can be drawn
between staking and mining rewards

13. • Activity on specific protocols reward participants for such activity (i.e. lending)
• Crypto received for lending is comparable to interest and is ordinary income at
the time of receipt at its fair market value
• Caveat: certain protocols’ interest accruals are structured as token
exchanges which could have capital gains tax implications
• Certain protocols mint tokens on your crypto deposit to become operable on the
network
• Such exchange can be considered taxable based on current IRS guidance
The IRS hasn’t provided specific guidance on yield farming or transfers to the DeFi
protocols that mint tokens in exchange for your crypto. Additional IRS clarity is
required.
Yield Farming

14. • Forks
• Blockchain protocols are capable of being changed
• Some protocol changes result in a derivative of the legacy
distributed ledger yielding two separate blockchains (old and new)
that coexist going forward
• Certain forks yield new cryptocurrency on the derivative blockchain
• Airdrops
• Wallets containing certain cryptocurrency are sent (“airdropped”) a
new cryptocurrency which can be sourced to different occurrences
in a protocol
• Both airdrops and certain forks are considered ordinary income. Forks
need to be analyzed on a case-by-case basis.
Forks and
Airdrops

15. Non-Fungible
Tokens (NFTs)
• Method of creating and selling digital art or content
• Nontaxable
• Purchase of an NFT with fiat
• Taxable
• Purchase of an NFT with crypto
• Sale of NFT for fiat or crypto
• Trading one NFT for another
• The IRS has not provided specific guidance related to NFTs. However,
it is important to also consider the treatment of NFTs as collectibles
which have a higher long-term capital gains tax rate.

16. Crypto Tax Tips
• Consider donating appreciated crypto to qualified public charities
• Avoids the capital gains tax on the appreciation
• Fair market value deduction
• Caveat: factor in the AGI limitation of property to qualified public charities
• Capital loss harvesting
• Liquidate unrealized loss positions before the end of the year (stocks and/or crypto) to
reduce capital gains
• Wash sale rules do not currently apply to digital assets, unless that digital asset is a security
• Potential regulatory clarity may be on the way (SEC vs. Ripple Labs Inc.)

17. Foreign Compliance
• FINCEN Notice 2020-2 currently does not require a
Report of Foreign Bank and Financial Accounts
(FBAR) for virtual currency
• Amendments may be on the horizon
• The IRS has not provided clear guidance on the
reporting of cryptocurrency held in foreign exchanges
on the Statement of Specified Foreign Financial Assets
(Form 8938)
• Meet reporting thresholds (amount)
• Certain cryptocurrencies may be securities
• Conservative to report if reporting threshold met
and cryptocurrencies are held in wallets with
foreign exchanges

18. Crypto Tax Analysis
There are various tax software on the market that
assist with calculating the capital gains or losses
from your trades
Connect with application programming interfaces (APIs) to import and
build the tax data which can then be provided to the tax professional
Certain cases are very complex and require a tax
professional

19. Mainstream Interest
• Pandemic resulted in quantitative easing and hyperinflationary
pressure
• Accelerated migration towards mass digitization
Hedge against inflation
Decentralized finance (De-Fi)
Non-fungible tokens

20. BTCUSD versus DXY
Created using Barchart.com | Commodity, Stock, and Currency Quotes, Charts, News & Analysis

21. Questions?
PETER GOODRICH, CPA
Manager
Citrin Cooperman
pgoodrich@citrincooperman.com
212-697-1000

22. Thank You
F o r Wa t c h i n g & L i s t e n i n g
UPCOMING WEBINARS:
CHALLENGES & OPPORTUNITIES FOR BUSINESSES IN THE AGE OF DIGITAL ASSETS
May 5, 2021 | 12:00 PM ET/9:00 AM PT
Featuring: Mark DiMichael, Alexander Reyes, Peter Goodrich, David Rosenbaum, Jeff Neuburger