Case Study 5-1: Taxation of Cryptocurrency - Forks (Tax Liability)

Index - https://steemit.com/tax/@alhofmeister/tax-blog-index

To complete my earlier examples, I've decided to calculate the tax due on each one.

Note that this example treats the fork as other income and not subject to self employment tax. Also, I have included a more aggressive position that the Bitcoin Cash split would not result in a taxable event. This position is not recommended and would likely be overturned by the IRS. The IRS has not, however, specifically addressed the question of forks.

Problem
(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 April, 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) Also during April, Bitcoin Cash is distributed to every holder of Bitcoin. Taxpayer A receives 60 coins of Bitcoin Cash when it is valued on the futures market at $7.50 a coin. (5) In May, Bitcoin Cash spikes to $11 which prompts Taxpayer A to sell 30 Bitcoin Cash with the transaction cost of $1 a coin. (6) 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. (7) In June of the next year, Taxpayer A decides to sell off his remaining Bitcoin Cash (30) at the price of $16 with transaction costs of $1 a coin.

Solution
Conservative

Aggressive

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.