Between a Rock and a Hard Fork: The Tax Implications of Cryptocurrency

By Ryan Schuh & Kali McGuire¹

I. INTRODUCTION

The cryptocurrency bubble that appeared to peak in December 2017 will have considerable aftershocks in the coming years, and understanding the tax impact of the massive value gyrations of the various forms of cryptocurrencies on practitioners’ individual and institutional clients will be paramount. The additional estimated $25 billion in potential tax revenue² is of great interest and may lead to heightened enforcement efforts of the Internal Revenue Service ("IRS") and other regulatory bodies. This article explores some of the US federal tax implications of cryptocurrency to both individual and institutional investors in a variety of circumstances as well as the currently uncertain regulatory environment.

Three US federal regulators have introduced certain guidance on cryptocurrency in the absence of a comprehensive regulatory environment. The IRS has characterized cryptocurrency as property for tax purposes,³the Financial Crimes Enforcement Network ("FinCEN") monitors cryptocurrency as part of its anti-money laundering procedures,⁴ and the Securities and Exchange Commission ("SEC") has made some strong statements on initial coin offerings ("ICOs") and the trading of cryptocurrency, warning taxpayers about "rampant fraud" in the ICO market. While not inconsistent with each other, this multi-agency approach has confused tax and financial reporting, and has likely contributed to some level of non-disclosure or reporting as taxable income.⁵