Taxation of Cryptocurrencies (Portfolio 190)

Tax Management Portfolio, Taxation of Cryptocurrencies, No. 190, considers the U.S. federal income taxation of the convertible virtual currency known and implemented as Bitcoin — specifically, the open source software currently referred to as Bitcoin Core1 or software fully compatible with that reference version — because it was the only convertible virtual currency identified by the IRS in  Notice 2014-21. To view this Portfolio, take a free trial to  Bloomberg Tax.

Bloomberg Tax


This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news. 



Tax Management Portfolio, Taxation of Cryptocurrencies, No. 190, considers the U.S. federal income taxation of the convertible virtual currency known and implemented as Bitcoin — specifically, the open source software currently referred to as Bitcoin Core1 or software fully compatible with that reference version — because it was the only convertible virtual currency identified by the IRS in  Notice 2014-21.2Chapter I introduces and discusses certain aspects of Bitcoin. Chapter II addresses the U.S. federal income tax classification of bitcoin. Chapters  III and  IV consider the consequences of trading and investing in bitcoin, and the activities and selected transactions undertaken by investment entities, and foreign and tax-exempt investors. Chapter V identifies some of the issues which pose novel or challenging tax aspects of Bitcoin. Chapter VI outlines information reporting that may apply to bitcoin and similar cryptocurrencies.

This Portfolio endeavors to adhere to the community convention of identifying the reference version of the Bitcoin software as Bitcoin Core and other aspects of the protocol as Bitcoin (upper-case), and its native currency as bitcoin (lower-case). Bitcoin Core may be the master version or inspiration for other cryptocurrencies; however, seemingly unimportant differences between Bitcoin and other cryptocurrencies may result in significantly different federal income tax consequences.

The classification of bitcoin for U.S. federal income tax purposes is the basis for much of the detailed analysis in this Portfolio. A general classification of bitcoin for this purpose is merely a starting point that can be, and is, subject to exceptions. In addition, Bitcoin and its related technologies present new and novel U.S. federal income tax issues; therefore, the views expressed by the author are often based on interpretations that are intended to be (and, hopefully, are) neutral, as well as reasonably correct.

This Portfolio may be cited as Calvin, 190 T.M., Taxation of Cryptocurrencies.

1 The Bitcoin Core GitHub repository is at (last checked Dec. 4, 2018). Note that the lack of a central issuer is a fundamental aspect of cryptocurrency. Therefore, this portfolio contains several references to peer edited webpages. While these sources are not typical legal reference material, they provide practical insight and helpful background information on the complicated world of cryptocurrencies.
2  Notice 2014-21.



Jim Calvin

Jim Calvin is a tax partner with Deloitte Tax LLP. He has been with Deloitte in Singapore, Hong Kong, New York, and Boston, and is a graduate of the Rochester Institute of Technology.

He received the “Federal Tax Contributor of the Year” award from Bloomberg Tax for the year 2017. Previously, alone or as part of a small team, he developed several MS-DOS applications and libraries, including terminate-and-stay resident applications incorporating specialized compression algorithms. Some of these applications won multiple PC Magazine Editor's Choice Awards along with similar recognition from other technical publications.

The author gratefully acknowledges comments on earlier versions or certain parts of this Portfolio from the following individuals (alphabetically): Grant Anderson, Eric Byrnes, Nicholas Cerasuolo, Jamie Dahlberg, Paul Epstein, Steven Gilbert, Denise Hintzke, Laura Howell-Smith, Kenneth M. Kess, Peter Larsen, Robert Massey, Mary Rauschenberg, Jo Lynn Ricks, Braxton Roam, Jimmy Song, Peter Van Valkenburgh, and Joyce Welch. Any errors in the final version remain the responsibility of the author.

This Portfolio is not intended to provide legal, accounting, or tax advice for any purpose and does not apply to any person or factual situation. Neither the author nor the publisher assumes responsibility for the reader's reliance on information or opinions expressed in it, and the reader should verify the accuracy of all conclusions.

Table of Contents

Portfolio Description
Detailed Analysis
I. Introduction
A. Overview
1. Accounting for Transactions
2. Not All Bitcoins Are Equal or Transactions Anonymous
3. Limited Guidance
B. Bitcoin Exchanges and Financial Products
1. Bitcoin Trading on Exchanges
2. Inventory Dealers
3. Over-the-Counter Transactions
4. Bitcoin Derivatives and Products
5. Cryptocurrency Wallets
II. Federal Income Tax Classification of Bitcoin
Introductory Material
A. Notice 2014-21
1. Scope of the Notice
2. Summary of the Notice
B. Bitcoin: Money, Currency, or Commodity?
1. Money
a. In General
b. Wisconsin Central Case
c. Sale or Other Disposition of Property
2. Currency
a. Convertible Virtual Currency
b. FinCEN Classification of Virtual Currency
c. Other IRS Guidance Considering Currency
d. Foreign Currency
3. Commodity
III. Trading and Investing
A. Bitcoin Futures Contracts
B. Actively Traded Personal Property
C. Wash Sales
D. Section 988
E. Short Sales
1. Special Short Sale Rules
2. Property Subject to the Special Short Sale Rules
F. Like Kind Exchanges
G. Lending Bitcoin
1. Background
2. Section 1058 Security Loans
3. Federal Income Tax Considerations Related to Lending Bitcoin
a. Borrower Obligation to Return Equivalent Assets
b. Termination Notice Requirements
c. Effect on U.S. Trade or Business
H. Constructive Sales
I. Mark-to-Market Elections for Commodities Dealers and Traders
1. Dealer Status
2. Commodity as Defined by §475(e)(2)
J. Adequately Identifying Property Dispositions
1. Section 1012 Regulations
2. Account-by-Account Rule of §1012(c)
3. Section 988 Regulations
4. Overview of Adequate Identification of Stock Sold
a. Bitcoin Dispositions
b. Example of a Bitcoin Transaction
c. Standing Orders
d. Time for Making an Identification
IV. Selected Issues for Investment Entities
A. Partnerships
1. Transfers to Partnerships
a. Partnership Investment Company
(1) Stock and Securities as Defined by §351
(2) Money for Purposes of §721(b)
b. Contributions of Diversified Portfolios
2. Distributions to Partners
a. Money for Purposes of §731(a)(1)
b. Marketable Securities Treated as Money
c. Investment Partnership Exception
(1) Investment Partnership
(2) Eligible Partner
3. Reverse §704(c) Allocations
4. Publicly Traded Partnerships
B. Regulated Investment Companies
1. Investments in Commodities
2. Investments in Foreign Corporations
C. Bitcoin Exchange Traded Products
D. Tax-Exempt Investors
1. Debt Financed Property
2. Bitcoin Loans
E. Foreign Personal Holding Company Income
1. Definition of Commodity for Purposes of FPHCI
2. Exception for Dealers
a. Regular Dealer in Commodities
b. Defining Regular Dealer
c. Defining Dealer Property Including Hedges
F. Statutory Safe Harbors for Certain Trading Activities
V. Cryptocurrency Issues
A. Bitcoin Ownership
B. Exchange of Virtual Currency for Goods or Services
C. Realization of Income From a Chain Split
1. Chain Splits and Hard Forks
2. Doctrine of Dominion and Control Applied to Chain Splits
3. Federal Income Taxation of Unsolicited Property
4. Time Realized
5. Dominion and Control Over Some but Not All
6. Character of Income
7. Section 1411: Net Investment Income Tax
D. Bitcoin Mining
E. Qualified Charitable Contributions of Bitcoin
1. Substantiation Requirements
2. Contributions to Private Foundations
F. Losses Sustained by Individuals
1. Limited Deduction of Casualty and Theft Losses of Individuals
2. Worthless Security Losses
3. Reportable Transactions
VI. Information Reporting
A. Introduction
B. Section 6045
1. Sales Subject to Broker Gross Proceeds Reporting
a. Contracts Approved by the CFTC
b. Securities
2. Barter Exchange
3. Cost Basis Reporting
C. Form 8938
1. Directly Held Investment Assets
2. Foreign Financial Assets
D. FBAR Reporting

Working Papers

Table of Worksheets
Worksheet 1 Cryptocurrency Comparison Chart
Worksheet 2 Bitcoin Unspent Transaction Output (UTXO)