Bitcoin
ComplianceTax & AccountingFebruary 19, 2018

Taxation of Bitcoin Its Progeny and Derivatives Coin Ex Machina

By: Stevie D. ConlonAnna VayserRobert Schwaba
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Financial markets and investments continuously change, and bitcoin, a cryptocurrency, has been the recent focus of much attention by the investing public, the markets, and non-Luddites of all sorts. This report provides a primer on the state of general U.S. income tax issues for investors regarding cryptocurrencies and related financial derivatives, like cryptocurrency futures.

There were significant developments concerning cryptocurrencies in 2017. At the beginning of the year, a single bitcoin was valued at barely $1,000. By the end of 2017, however, that value exceeded $15,000. Market awareness and participation continued to grow in 2017, and the bitcoin blockchain forked twice (in August and November). In November, a published court decision on an IRS subpoena of bitcoin activities by participants, and bitcoin futures was introduced in December.

Much has been written about whether recent massive price fluctuations in bitcoin portend a tulip-mania-like market crash for cryptocurrencies. We leave those discussions to others. Instead, our goal is to lay out the fundamental tax issues for virtual currencies and their related derivatives. An important caveat regarding any discussion of financial innovations, like those covered here, is that there is little specific tax law on many aspects of cryptocurrencies or derivatives and what law can change. Accordingly, we have tried to identify the relevant tax questions in many cases, even if there is no clear answer.

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