One Student’s Proposal to the IRS on Cryptocurrency

Student blogger: David Ash

Evolving nature of accounting and cryptocurrency

Many people who aren’t accountants think that accounting has been the same boring thing for centuries – debits, credits, and journal entries. However, accounting is always evolving with the everlasting changing business landscape. Cryptocurrency is a good example and has changed the accounting landscape once again. Cryptocurrency was created to be used online as a currency. Cryptocurrency is designed to eliminate third party intermediaries in an online transaction such as a bank. Many individuals use cryptocurrencies to buy consumer discretionary products such as products or services.

Lately, cryptocurrencies have been treated as an investment vehicle. Many cryptocurrency investors buy, sell, or even mine cryptocurrency in hope of receiving a return on their original basis. Since cryptocurrency is such a new concept to the IRS, it raises many questions on how the IRS will tax investors on their proceeds from cryptocurrency trading.

IRS publications and tax effects

In April 2014, the IRS issued Bulletin: 2014-16. In the “IRS Virtual Currency Guide” section of Bulletin 2014-16, the IRS discusses the tax implications of transactions with cryptocurrencies. The IRS recognizes cryptocurrency can be used to pay for goods or services and can be held for investment purposes. Cryptocurrencies operate as a currency, however, the IRS does not recognize the currency to have any legal tender status.

Unlike legal tender status currency, cryptocurrency may result in a tax effect when used to pay for real world goods or services. Cryptocurrency is recognized as property or a capital asset and not seen as currency in the eyes of the IRS. Therefore, the federal income tax implications used for property or capital assets, such as long term/short-term capital gains or losses, will be applied to cryptocurrency when used to pay for goods or services.

According to the IRS, the tax implications of mining cryptocurrency are simple. When the taxpayer successfully mines cryptocurrency, they must recognize fair market value of the cryptocurrency at that time. This is included in that taxpayer’s gross income for that tax year.

My proposal for how accountants and agencies should handle cryptocurrency

I believe that it would be easier for everyone if the IRS and SEC soften up on their position of cryptocurrency. If the government would recognize cryptocurrency as legal tender in the United States it would make it easier to regulate.

The benefits of allowing cryptocurrency having legal tender status would allow consumers to buy goods and services with the currency without any tax implications. For example, the USD’s value is constantly changing every day, but we don’t have to pay tax on it. Another benefit would be that trading platforms would implement the cryptocurrency for forex trading. Trading platforms would issue 1099’s to the tax payer and IRS. Then there would be no ethical dilemma whether the taxpayer traded cryptocurrency in a tax year or not.

Sources

IRS. (2014, April 14). Internal Revenue Bulletin: 2014-16. Retrieved from http://www.irs.gov:

https://www.irs.gov/irb/2014-16_IRB#ANN-2014-14

About txcpa2b

The Texas Society of Certified Public Accountants (TSCPA) is a nonprofit, voluntary, professional organization representing Texas CPAs. TSCPA has 20 local chapters statewide and has 27,000 members. The Society is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession. TXCPA2B is a blog written by Texas students in pursuit of the CPA certificate. The views expressed here are those of the authors and not necessarily held by TSCPA or our members.
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