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Friday, June 8, 2018

Virtual Currency Tax Issues & AICPA Suggestions to IRS


It is not uncommon for the tax law to lag behind changes in how we live and do business. A good example is virtual currency, such as bitcoin. Bitcoin started in 2009 and the IRS first issued guidance in early 2014 (Notice 2014-21) stating to treat it as property rather than as a real currency. As bitcoin grew in value and use, hundreds of other virtual currencies came into existence and the types of transactions grew, we needed more guidance.

In 2014, the IRS asked for input on where more guidance was needed and it did receive some. But we have no more guidance from the IRS. Some of the transactions are complex without obvious answers and the IRS has a lot on its plate.

On May 30, the AICPA submitted a letter to the IRS with 27 Q&As covering the following 12 topic areas where guidance is needed. The AICPA provided answers to the questions to help the IRS with issuing additional formal guidance.
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1.      Expenses of Obtaining Virtual Currency
2.      Acceptable Valuation and Documentation
3.      Computation of Gains and Losses
4.      Need for a De Minimis Election
5.      Valuation for Charitable Contribution Purposes
6.      Virtual Currency Events (such as splits/forks, airdrops and giveaways)
7.      Virtual Currency Held and Used by a Dealer
8.      Traders and Dealers of Virtual Currency
9.      Treatment under Section 1031
10.  Treatment under Section 453
11.  Holding Virtual Currency in a Retirement Account
12.  Foreign Reporting Requirements for Virtual Currency

For example, for topic 1 the AICPA suggests that since mining virtual currency produces ordinary income at that time, the expenses of mining should be deductible against that income, similar to what a service provider does.

Hopefully this will help the IRS in thinking through some challenging issues. Guidance is very much needed as many people own and use virtual currency and some of the transactions involve large values.

What do you think?

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