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Bitcoin Transaction Reporting

A growing number of individuals and businesses own bitcoin or use it for transactions (perhaps with a third party actually handling the bitcoin to cash exchange). So, more people, including tax practitioners, need to know the federal guidance at Notice 2014-21.

I was interviewed recently for an article in Business Insider by Jonathan Marino on the topic. The article is titled: “Bitcoin will be a big mess for both Bitcoin holders and the IRS.” That may be true for some, but it doesn’t necessarily have to be.

Certainly, if an individual has been using bitcoin regularly and not doing anything to track the basis and value for each transaction, they have some catching up to do. If someone gets on a system of tracking, they should have the data all ready when it comes time to file their income tax returns. And, there are tools available to assist with this. Your bitcoin wallet should help. And, there is specific software, such as that from LibraTax (note, I’m on their tax advisory board).

The IRS guidance says that virtual currencies are property (not currency). So, each time you use bitcoin to buy something, you have bartered (exchange of property for property or services). The tax effect with respect to the bitcoin is that you basically sold it for the value of the item you received (clothing, coffee, haricut, etc.). So, you need to know the basis of the bitcoin you used and when you acquired it. So you can determine the amount of the gain or loss and whether long-term (over one year) or short term.

Challenges include though:

• Knowing the basis. You might not easily be able to tell which bitcoin you used. Best to use multiple codes to help. If you really cannot tell, can you default to a FIFO system? The law doesn’t provide for that, but if you can’t do anything else, perhaps it is better than nothing. This is something the IRS needs to address – and soon.

• If you have a gain, it is taxable.

• If you have a loss, it might not be usable. If all you do with your bitcoin is use it for personal purchases, the bitcoin sounds like a personal use asset and you can’t claim such losses (you do have to pay tax on such gains though). Are you holding your bitcoin for investment? Then it is the same rules for when you hold corporate stock. What if you hold it for both? Identify for each transaction, how you held that bitcoin (sounds odd, but that is what the federal tax rules on property call for). You could separate the virtual currency into multiple wallets – one for investment and one for personal use. That would make it all easier.

The IRS sought comments when it released guidance back in March 2014. It doesn’t look like they got many so far. A few areas where guidance would be extremely helpful for indviidauls are:

• Allow for FIFO for tracking basis (or perhaps also a LIFO option).

• State what are reasonable methods for identifying the value when used (which exchange rate to use, use of an average for the day or the week, etc.)

• Push Congress to provide a rule similar to that for foreign currency (IRC Section 988(e)) that for a de minimis amount of virtual currency held for personal use ($200 is the Section 988(e) amount), there is no need to deal with gains and losses from using it (so no need to track).

Practitioner tip: Be sure to ask all of your clients if they own or use virtual currency so you don’t miss it for their 2014 income tax returns.

What do you think?  Let’s Meet on TaxConnections.

Original Post By:  Annette Nellen


Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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