BICOL COLLEGE

Daraga, Albay

College of Accountancy

Dilemma of Tax Treatment of Cryptocurrency

A synthesis paper

submitted to the faculty

of College of Accountancy

LINDSAY B. BONCODIN

BSA V

DR. JEAN C. DELA TORRE, CPA, MBA, Cat1/ CB

Dean

July 20, 2018

Introduction

Cryptocurrency is a form of digital or virtual currency designed to work as a medium

of exchange. It uses cryptography to secure and verify transactions as well as to control the creation
of new units of a particular cryptocurrency.

In early 2009, an anonymous programmer introduced Bitcoin. It is described as a “peer-to-

peer electronic cash system”. It is totally decentralized, meaning there are no servers involved and
no central controlling authority.

The first problem encountered with the use of the virtual currency is double spending,
however, with the creation of bitcoin solved the dilemma. They have unraveled the problem through
the creating a public ledger called the “block chain” that records every users’ transaction. Bitcoin, as
of 2017 is the most widely circulated digital currency or e-currency. It is convertible virtual currency
because it has an equivalent value in real currency.

Another underlying problem with the use of virtual currency is its tax treatment. Different
countries have distinctive treatment tax purposes. Like the United States, virtual currency is taxable
while in the Philippines it is not still taxable. The US follows the IRS Notice 2014-21 to solve the
confusion brought by using cryptocurrency.

Keywords: cryptocurrency, tax, treatment, IRS Notice 2014-21, confusion

United States Tax Treatment of Virtual Currency according to International Reporting

Standard

In March 2014, the IRS issued Notice 2014-21 and Information Release IR-2014-36, on the
income tax treatment virtual and convertible currency such as bitcoin. The IRS has ruled that virtual
currency is treated as property rather than currency for tax purposes. General tax principles that
apply to property transactions apply to transactions using virtual currency. It has to be valued when
used such as to buy goods or to compensate an employee when determining the tax consequence.

Like for an instance, when one purchased bitcoins amounting for $100 and then uses that
bitcoin amount to $150. The person has a gain of $50 on this transaction, considering she is an
investor, it is treated as a capital gain. In other words, the standard treats the income or gains from
the sale of a virtual currency, as a capital asset that is subject to either short term or long term capital
gains tax rates. Gain on sale of a cryptocurrency that qualifies as a capital asset is netted against
other capital gains and losses. If a taxpayer acquires cryptocurrency as an investment and choses
to dispose it, through purchasing or merchandise or service, loss realized will be deductible as
investment loss. By treating bitcoins and other virtual currency as property instead of currency, the
international reporting standard to impose extensive record keeping rules and significant.

Bitcoins that are used to pay for goods and services are taxed as income. In case if you’re
an employer paying with Bitcoins, you must report employee earnings on the form. The value in
bitcoin must be converted to the real currency like the US dollars as of the date each payment is
made and must be recorded well. The wages paid in virtual currency are subject to withholding to
the same extent as dollar wages. The employees must report their wages in dollars although earned
as bitcoin.

On the other hand, bitcoin miners must report receipt of the virtual currency as income.
Bitcoin mining is the process by which transactions are verified and added to the public ledger. The
process involves compiling recent transactions into blocks and trying to solve a computationally
difficult puzzle. Cryptocurrency mining is considered a trade or business for tax purposes. If the
transaction falls under trade or business, the net earnings from mining are subject to self-employment
tax. In compliance with the IRS, when a taxpayer successfully mines bitcoin and has earnings from
that activity whether in the form of bitcoin or any other form must include it in his gross income after
determining the fair market value of the dollar of the time he received it. Generally, income received
by miners of cryptocurrency is considered ordinary.

Philippines tax treatment of virtual currency

There is still confusion on how this currency must be treated in taxation, so the treatment
varies depending on the regulation of the taxing authority of the nation. In the Philippines, there are
not any regulation concerning cryptocurrencies such as bitcoin with regards to taxes. However, the
Bangko Sentral ng Pilipinas has released guidelines on virtual currency exchanges operating in the
country. Therefore, in the Philippines any transaction or revenue derived from bitcoin is technically
is still not taxable.
Conclusions/ Recommendations

The International Reporting Standard addressed the taxation of virtual currency in Notice
2014-21. According to the notice, virtual currency is treated as property for US federal tax purposes.
This means that, depending on the taxpayers’ circumstances, cryptocurrencies, such as Bitcoin can
be classified as business property, investment property or personal property. General tax principles
applicable to property transactions must be applied to exchanges of cryptocurrencies. Therefore,
notice 2014-21 holds that taxpayers recognize gain or loss on the exchange of virtual currency for
other property. Likewise, any gain or loss transaction using bitcoin must be properly recognized.

When determining the taxation of cryptocurrency transactions, it is very important for the
owners to properly track basis. Basis is generally defined as the price paid for the virtual currency
asset. Taxpayers must consistently track their basis to properly report the gain or loss on every
transaction.

Since there is still turmoil in the tax treatment of cryptocurrency, users must put into
consideration the tax regulation of his nation on the matter. For others it might still be not taxable,
but through the changing demand and use of these currencies it will also become taxable. The IRS
must still continue to pursue further studies on how virtual currency must be taxed and all countries
must comply with the treatment to avoid conflict.
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