Scenario
Emily Carter’s Cryptocurrency Dilemma Emily Carter, a technology entrepreneur, recently came to you, her tax advisor, seeking guidance on the tax implications of her cryptocurrency transactions. Over the past several years, Emily had built a diversified digital asset portfolio, but as tax season approached, she became increasingly concerned about potential tax liabilities. Sitting across from you in your office, she sighed. “I’ve been trading and using crypto for years, but I never really thought about the tax consequences. My accountant mentioned that I may need to report my cryptocurrencies on my tax return and some of my transactions could be taxable, and I want to make sure I’m doing everything correctly.” Building a Crypto Portfolio Emily’s journey into the world of digital assets began in 2017 when she attended a blockchain conference and was fascinated by the potential of cryptocurrencies. Inspired by the discussions, she made her first investment in Bitcoin, purchasing 5 coins at $2,500 each, for a total of $12,500. Over the years, she continued investing, and by 2021, when Bitcoin had surged to $50,000 per coin, she purchased an additional 2 Bitcoins for $100,000. Wanting to expand her portfolio, Emily also participated in the initial coin offering (ICO) of NovaToken, a blockchain project focused on decentralized finance (DeFi). She invested $20,000 and received 50,000 NovaTokens. Now, with tax season approaching, Emily looked concerned. “Since I’ve bought different types of cryptocurrencies at different times, I need to understand how my tax basis is calculated and how it will impact my tax obligations. Can you explain this to me?” Market Crash and Losses The year 2022 was a tough one for the cryptocurrency market. Bitcoin, which had reached record highs, plummeted by more than 60%. Meanwhile, NovaToken, the promising blockchain project she had invested in, failed to meet regulatory requirements and lost most of its value. In late 2022, Emily decided to cut her losses and sold her entire NovaToken holdings for just $1,500, incurring a $200 transaction fee. Frustrated by the loss, she turned to you for advice. “I lost nearly all of my investment in NovaToken. How is this loss treated for tax purposes? Can I deduct it, and if so, how does it impact my overall tax liability?” Using Bitcoin for Large Purchases Despite the volatile market, Emily was still excited about the potential of cryptocurrency. In 2023, she decided to use 1 Bitcoin, valued at $45,000 at the time, to purchase a luxury electric vehicle. She also paid an additional $1,000 in transaction fees. 2 Now, she’s wondering about the tax consequences of this transaction. “Since I didn’t technically sell my Bitcoin for cash, do I still have to pay taxes on it? And if so, how much will I owe?” Charitable Giving and Retirement Planning Towards the end of the year, Emily considered donating 2 Ethereum tokens to a nonprofit organization that supports STEM education for underprivileged children. The nonprofit is a registered 501(c)(3) organization, and at the time of donation, each Ethereum token was valued at $3,000. Looking for tax-efficient strategies, she asked: “If I donate these Ethereum tokens, will I get a tax deduction? If so, how much will I be able to deduct?” Additionally, Emily had been researching self-directed Individual Retirement Accounts (IRAs) and was curious about whether she could contribute cryptocurrency as part of her retirement savings strategy. She looked at you with a thoughtful expression. “I’ve heard that I can contribute Bitcoin to an IRA. Is that actually allowed, and what are the tax implications?” 3 Spring 2025 Tax Memo Requirements Conduct tax research to identify the tax issues related to Emily’s Bitcoin activities.
You need to prepare
1) an internal memo to document your research findings, and 2) an email draft response to your client. Please note that the memo should include an analysis and conclusion about the proper tax treatment of each of the identified issues. Include primary authorities to support the suggested conclusion as well as any authorities that are contrary to this position, if any. Please follow the tax memo rubrics closely to ensure that you cover all required elements.
(Note: cryptocurrency is a new technological development that does not have specific primary authority. You will need to relate existing primary authority to a new setting. IRS Guidance: https://www.irs.gov/filing/digital-assets https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtualcurrency-transactions https://www.irs.gov/newsroom/taxpayers-need-to-report-crypto-other-digital-asset-transactionson-their-tax-return Secondary Tax Article: see attached article: “Taxation of Digital Assets”, from CCH AnswerConnect)
