How to treat virtual currency



Video transcript:

As far as due diligence for a client that might own virtual currency, the most important first thing to do is to make sure you’re asking all of your clients, “Do you have do you use a virtual currency such as bitcoin, litecoin, whatever it might be?” I find that a lot of practitioners are like, “No, my clients don’t do that,” but among all their clients, there is probably at least one that is doing it. And the incredible increase in value we’ve seen in the last year-plus on bitcoin. They also might get some folks coming to them, because, for example, if someone had a $100 of bitcoin in 2010, that is worth over $4.3 million today. At that point, they might decide, “Maybe I’ll track down a CPA. That might help me on what I’m doing with this, because now it sounds like a lot of dollars here.” Because — very likely that person is like, “I’m over-invested in bitcoin, and maybe I want to do other things, but maybe I have some tax considerations, or maybe I’m more noticeable now that, you know, I have a whole different net worth here.”

So just asking if they have that, you might find that clients perhaps could be mining the coin, meaning they’re just getting it, and the IRS has said, if you are mining it, you’re getting income when you get that, and if you’re doing it in a manner that looks like a business, you would also have self-employment tax. Also, if a person has virtual currency and they’re using that to buy either another type of virtual currency or maybe buying something outside of that that realm, the IRS has said in Notice 2014-21 that this virtual currency should be treated as property.

There are some software tools you can find that will help you track it. I think it’s also good to ask your client, “Tell me about this virtual currency,” to see what they know about it because, if they don’t know a lot, they might not be aware of what they’ve got, how to protect it, what they can and can’t easily do with it. What kind of tax considerations would come into play on that. But sometimes certainly as we see that the bitcoin go to such a high value, of course, it also could drop at some point, but I think it’s also attracting attention as people see it worth that much.

There are several questions that the AICPA had asked the IRS to clarify, and the IRS asked for questions so that they could clarify when they issued the Notice 2014-21. But no guidance has been coming, and it includes everything such as, “If you did take your bitcoin and use it to acquire litecoin, would that be treated as a like-kind exchange?” “What factors would indicate that two virtual currencies would be considered like kind?” And that would be helpful to hear from the IRS. Also on Aug. 1, 2017, there was the bitcoin fork, and apparently a fork can occur in a variety of times. This was one was significant just because the value of the bitcoin was quite high on Aug. 1, 2017.

The IRS hopefully will issue some guidance as to how that’s to be treated, because there’s a few possibilities. Maybe it’s like a stock split, because you didn’t necessarily get anything handed to you that was new; it all came out of your original bitcoin. Just like if there is a stock split, you are not getting new stock; it’s just -– it’s split. But it’s unlike a stock split, the fork. That other part is not exactly like the original bitcoin. It’s supported by different software and protocols underlying it. And, obviously, for some people, that’s a big dollar amount, so hopefully we will hear some guidance from the IRS, and I think the AICPA might be suggesting some possible guidance on what that should look like.

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