Case Study 1: Taxation of Cryptocurrency

Introduction
To help facilitate a better understanding of the taxation of cryptocurrency, I've decided to put together a series of examples which increase in complexity to demonstrate the potential tax implications of investing in cryptocurrency. I'll break each example out to include the tax impact of the various transactions occurring in 2017 and the tax impact if the scenario occurred in 2018 to demonstrate the effects of the new tax law.

Notice in this first example that there is no difference between 2017 & 2018 tax treatment. This will change in future examples.

Scenario
(1) Taxpayer A decides to invest in Bitcoin. In January, Taxpayer A buys 100 coins at the price of $9 a coin with a transaction fee of $1 a coin spending a total of $1,000 to acquire the coins. (2) In March, Taxpayer A panics at a drop in the price of Bitcoin and sells off 10 coins for $6 a coin with a transaction cost of $1 a coin making a total of $50 off the sale. (3) In October, Taxpayer A decides to sell off 20 coins when the price of Bitcoin spikes to $16 at a transaction cost of $1 a coin making a total of $300. (4) In February of the next year, Taxpayer A decides to sell off his remaining Bitcoin at $21 a coin with a transaction fee of $1 a coin receiving $1,400.

2017 Tax Treatment
Year 1

In year 1, Taxpayer A would recognize a short term capital loss of $50 on the initial sale in March which would be offset by their $100 short term capital gain of $100. Net, Taxpayer A would report $50 of short term capital gain on their 2017 individual income tax return.

In Year 2, Taxpayer A would recognize long term capital gain of $700 on their 2018 individual income tax return.

2018 Tax Treatment

In year 1, Taxpayer A would recognize a short term capital loss of $50 on the initial sale in March which would be offset by their $100 short term capital gain of $100. Net, Taxpayer A would report $50 of short term capital gain on their 2018 individual income tax return.

In Year 2, Taxpayer A would recognize long term capital gain of $700 on their 2019 individual income tax return.

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.