This memorandum discusses the tax treatment of Bitcoin in the US. It notes that the IRS issued guidance in March 2014 treating Bitcoin as property for tax purposes. This means that Bitcoin transactions are taxable in the same way as property transactions. The memo provides details on how to calculate capital gains and losses from Bitcoin use and explains the tax obligations of Bitcoin miners and those who receive Bitcoin for goods or services.

1. Memorandum
To: Andrew Gordon, Michael Raff
From: Jerry Woods
Date: April 21, 2014
Re: Bitcoin and its place in an evolving E-conomy
Questions Presented
1. Is Bitcoin taxable under current U.S. tax law?
2. If taxable under current U.S. tax law, how should taxpayers report their Bitcoin use?
Brief Answers
1. Bitcoin is taxable under current U.S. tax law any time that a taxable event occurs, such as exchanging
to fiat currency or trading for goods and services.1
2. Taxpayers using Bitcoin would report their use in the same way that they would report any
transactions that involve the transfer of property.2
Facts
Bitcoin is a peer-to-peer decentralized electronic currency which enables the user to transact actual
business with any other Bitcoin user in the world. So far, Bitcoin users have enjoyed low transactional
costs while engaged in business with those who accept Bitcoin.3
1
Forbes: Bitcoin is Not Anonymous and is Always Taxable. December 16, 2013.
2
IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property For U.S. Federal Tax Purposes;
General Rules for Property Transactions Apply. IR­2014­36, March 25, 2014.
3
Securities and Exchange Commision v. Shavers, Not Reported in F.Supp 2d, 2013 WL 4028182, Fed.
Sec. L. Rep. P 97,596, E.D.Tex., August 6, 2013 (No. 4:13­CV­416), (Citing Derek Dion, I’ll Gladly Trade
You Two Bits on Tuesday for a Byte Today: Bitcoin, Regulating Fraud in the E­Conomy of Hacker­Cash,
2013 U. Ill. J.L. Tech & Pol’y 165, 167 (2013)); Wall Street Journal: How Will The IRS Tax Bitcoin?
December 20, 2013.

2. Satoshi Nakamoto is a presumed pseudonym for the individual who first developed Bitcoin in 2009
when twenty-one million e-coins were planted into the virtual ground. Bitcoins are modeled after
precious metals inasmuch as they must be “mined” to be placed into online circulation. In order to mine
these coins, the miner uses highly sophisticated computer software on a high-powered computer capable
of solving complex mathematical algorithms.4
The software “mines” by collecting and validating network transactions. These transactions are put into
“blocks” which are added to the network’s block chain. If successful, the miner is rewarded in Bitcoin.
Once mined and placed into circulation, anyone can purchase Bitcoins and use for their own purposes in
much the same way an individual uses cash. Although Bitcoin is not government-backed like fiat
currency, it can be used to buy goods and services the same way that traditional currency is used. Because
each Bitcoin has its own distinct numeric identification, it’s virtually counterfeit-proof. The lack of bank
and government regulation of Bitcoin only adds to the allure of this e-currency.5
Discussion
As of March 25, 2014, the IRS issued its notice which explains that electronic currencies, including
Bitcoin, will be treated as property for U.S. tax treatment purposes. Prior to March 25, there were no IRS
guidelines which specifically addressed the perplexing taxation issues that Bitcoin and other e-currencies
present. Despite this, U.S. tax laws do require taxpayers to report any taxable event, regardless of its
source, and pay taxes accordingly.6
Tax experts suggest that Bitcoin transactions can function like barter exchanges. For tax purposes, barter
exchanges are likened to compensation for services rendered, which are defined as taxable income under
26 U.S.C. § 61. Bitcoin is also similar to a commodity like gold or silver where capital gain treatment is
concerned. Capital gains and losses are defined under 26 U.S.C. § 1221 and § 1222. Individuals who
exchange Bitcoin for currency would receive gains on any appreciation and losses for any depreciation.7
4
Wall Street Journal: How Will The IRS Tax Bitcoin? December 20, 2013; GAO: Report to the Committee
on Finance, U.S. Senate. Virtual Economies and Currencies, Additional IRS Guidance Could Reduce Tax
Compliance Risks. May 2013.
5
GAO: Report to the Committee on Finance, U.S. Senate. Virtual Economies and Currencies, Additional
IRS Guidance Could Reduce Tax Compliance Risks. May 2013.
6
IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property For U.S. Federal Tax Purposes;
General Rules for Property Transactions Apply. IR­2014­36, March 25, 2014; GAO: Report to the Committee
on Finance, U.S. Senate. Virtual Economies and Currencies, Additional IRS Guidance Could Reduce Tax
Compliance Risks. May 2013; Forbes: Bitcoin is Not Anonymous and is Always Taxable. December 16,
2013.
7
IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property For U.S. Federal Tax Purposes;
General Rules for Property Transactions Apply. IR­2014­36, March 25, 2014; Forbes: Bitcoin is Not
Anonymous and is Always Taxable. December 16, 2013; Cornell University Law School,

3. The biggest risks the IRS and other tax experts have identified are underreporting, mischaracterization,
and evasion. The same risks exist for traditional currency-based transactions, particularly those involving
cash, where third-party recordkeeping is inconsistent at best. Well-intentioned taxpayers may search the
internet for Bitcoin tax reporting advice only to be inundated with misinformation, including that they
have no liability whatsoever.8
Those taxpayers who know they may be liable may not understand how to characterize Bitcoin income
when the time comes to report it. This confusion may be in whether to report the income as property,
barter, foreign currency, or financial instrument.9
Unsophisticated taxpayers who receive income from Bitcoin may not understand how to calculate their
basis for gains. Further, individuals may not be liable if the income earned is likened to income earned at a
garage sale, where merchandise is generally sold for less than its original purchase price. Because virtual
economy transactions are exceedingly difficult to track, including determining transacting parties’ true
identities, third-party reporting may be extraordinarily burdensome to conduct. Because virtual economy
transactions offer a degree of anonymity, there is a heightened threat of taxpayer evasion.10
Bitcoin miners are essentially business-owners who manufacture and distribute a product, albeit digital.
Therefore, Bitcoin miners would pay taxes the same way any business-owner does.11
The challenges that Bitcoin and other e-currencies pose prompted the IRS to create guidelines for
taxpayers to follow when reporting their Bitcoin use. The IRS guidelines state that e-currencies are to be
treated as property for federal tax purposes because general tax principles which apply to property
transactions also apply to e-currency transactions.12
When computing gross income, an individual who receives e-currency as payment for goods or services
must include the e-currency’s fair market value. That value must be measured in U.S. dollars and must
reflect the date that the transaction took place. The basis that the individual should use when determining
tax liability is the fair market value of the e-currency effective on the date of receipt. To determine that
http://www.law.cornell.edu/uscode/text/26/61, http://www.law.cornell.edu/uscode/text/26/1221,
http://www.law.cornell.edu/uscode/text/26/1222.
8
GAO: Report to the Committee on Finance, U.S. Senate. Virtual Economies and Currencies, Additional
IRS Guidance Could Reduce Tax Compliance Risks. May 2013.
9
GAO: Report to the Committee on Finance, U.S. Senate. Virtual Economies and Currencies, Additional
IRS Guidance Could Reduce Tax Compliance Risks. May 2013.
10
GAO: Report to the Committee on Finance, U.S. Senate. Virtual Economies and Currencies, Additional
IRS Guidance Could Reduce Tax Compliance Risks. May 2013. But see Forbes: Bitcoin is Not Anonymous
and is Always Taxable ­ Part 2, January 6, 2014.
11
Forbes: Bitcoin is Not Anonymous and is Always Taxable ­ Part 2, January 6, 2014.
12
Internal Revenue Service Notice 2014­21, 2, March 25, 2014.

4. value, the e-currency must be converted into U.S. dollars - or another real currency which is in turn
converted into U.S. dollars - at a reasonable, consistently applied exchange rate.13
The taxpayer would be responsible for reporting any e-currency gains and losses. The nature of that gain
or loss depends on whether the taxpayer uses e-currency as a capital asset, such as any investment property.
With capital assets, a taxpayer will realize a capital gain or loss at the point of e-currency sale or exchange.
Whereas assets like inventory, which are held for sale to customers in trade or business, are not capital
assets. Therefore, these would receive ordinary capital gain or loss treatment.14
A taxpayer who successfully “mines” for Bitcoin and other e-currencies must include the fair market value
as gross income. Self-employment taxes apply in situations where the miner’s activities are not undertaken
as an employee of a mining operation. Further, e-currency which an independent contractor receives for
services rendered is subject to the self-employment tax. An employee who receives e-currency for services
rendered from their employer is subject to federal income tax withholding.15
Payments made using e-currency are subject to tax reporting and backup withholding like any other
property based payment. Third party settlement organizations are required to report any payments made
to merchants using a Form 1099-K.16
Taxpayers who treated their e-currency in a manner inconsistent with the IRS notice prior to the March
25, 2014 posting are subject to penalties. However, taxpayers may receive relief for reasonable cause.17
Conclusion
Throughout history, people have created various currencies for their transactional needs. Taxation has
almost always been part of the equation and continues to evolve as new currencies develop. The IRS’s
recently released e-currency tax reporting guidelines are the latest in a continuing series of steps to
minimize taxpayer confusion and maximize taxpayer compliance.
13
Internal Revenue Service Notice 2014­21, 2, 3, March 25, 2014.
14
Internal Revenue Service Notice 2014­21, 3­4, March 25, 2014.
15
Internal Revenue Service Notice 2014­21, 4, March 25, 2014.
16
Internal Revenue Service Notice 2014­21, 5, March 25, 2014.
17
Internal Revenue Service Notice 2014­21, 6, March 25, 2014.