Basis issues in cryptocurrency

By Brandon M. Miller, CPA, Baltimore

Editor: Anthony S. Bakale, CPA
Cryptocurrency has recently attracted attention from investors in all walks of life. Unfortunately, the legal and regulatory environment for cryptocurrency has not yet been fully developed, including in the area of taxation. The IRS views cryptocurrency as property and not as a currency. Consequently, for investors, it will be regarded as a capital asset for tax purposes, which means that a key component of correctly determining the tax treatment of a cryptocurrency investment will be establishing its basis. Cryptocurrency investments pose unique challenges in calculating their basis.

Calculating the initial basis in a cryptocurrency investment is straightforward. When U.S. dollars (USD) are used to purchase a major cryptocurrency such as bitcoin (BTC) or ethereum (ETH), the basis in that investment will be the amount of the fiat currency used to purchase it, which is no different from establishing a basis for numerous other capital assets. However, cryptocurrency investing can quickly become a nightmare for basis calculation from there.

Exchanging cryptocurrencies

A common transaction in cryptocurrency investing is exchanging one cryptocurrency for another cryptocurrency. This is especially true because investors frequently dabble in cryptocurrencies that cannot be directly purchased using fiat currency and can be acquired only by exchanging major cryptocurrencies such as BTC or ETH for them. From a basis calculation standpoint, exchanges of cryptocurrencies are important because one capital asset is being disposed to acquire another. This type of transaction not only triggers a taxable event from the disposition, but it also requires the basis to be calculated on the newly acquired cryptocurrency. This is challenging because at no point in the process has any cash been exchanged. Thus, exchange calculations will have to be made to determine the basis in the newly acquired cryptocurrency.

For example, according to CoinMarketCap historical data, 1 BTC could be exchanged for between $6,817 and $7,135 on April 2, 2018. Thus, an investor who exchanged 2 BTC for an altcoin such as 0x (ZRX) on that date could have a basis in the acquired ZRX ranging from $13,634 to $14,270, depending on when the exchange was made. However, available data from the exchanges or other sources will often not be sufficient to pinpoint the exact BTC/USD exchange rate at the time of the exchange. For these instances, when establishing a basis, the investor will need to use a consistent standard for determining the exchange rate. A common choice for this purpose is the day's closing prices, which are based on the exchange rates at midnight UTC, as data are readily available and generally reflect the day's trading activity. For April 2, 2018, this price was $7,083, according to CoinMarketCap, which would set the basis in the acquired ZRX at $14,166.

Basis reporting and recording

Another challenge in basis calculation is the lack of information reporting with respect to cryptocurrency exchanges. Cryptocurrency exchanges are not currently understood to be included in the scope of a "broker" as defined by Sec. 6045 and related regulations. As such, cryptocurrency investors will generally not be able to rely on Forms 1099 for support or reconciliation of basis information. In the absence of broker records, some third-party applications may be able to assist a cryptocurrency investor compile tax and holdings data using exchange data and public keys. However, much like the asset class itself, these services are in their infancy and may not be available for all exchanges and cryptocurrencies, or could be costly, depending on the volume of cryptocurrency transactions to be analyzed. As a result, it is critical for investors to maintain independent basis records for proper tax reporting.

Hard forks

In addition to the challenges created by frequent cryptocurrency-for-cryptocurrency exchanges and the dearth of readily available information, cryptocurrency investors also must contend with transactions unique to the asset class. Perhaps the most prominent such transaction is the hard fork. In brief, a hard fork represents a permanent change to the coding of a cryptocurrency's underlying blockchain that necessitates the creation of a separate and distinct cryptocurrency. Hard forks may be triggered for different reasons, but for the purposes of discussing basis in cryptocurrency, the relevant consideration is that two distinct cryptocurrencies will exist after the hard fork — one representing the old blockchain ledger and one representing the new blockchain ledger.

A hard fork could be viewed in multiple ways, and the approach taken would affect how basis is calculated. One way to view a hard fork is that it results in the receipt of a new asset, which is supported by the fact that a cryptocurrency resulting from a fork will have at least some differentiating characteristics from the original cryptocurrency. This approach would result in ordinary income recognition based on the opening market value of the new cryptocurrency and a matching basis. The basis in the original cryptocurrency would be unaffected.

An alternative viewpoint on a hard fork is that it is somewhat like a spinoff or stock split and should be regarded as splitting an existing cryptocurrency in two. This viewpoint is much more likely to be viewed as aggressive by the IRS, as cryptocurrency does not fit well into the existing provisions allowing for nonrecognition treatment. For example, Secs. 355 and 368, which pertain to spinoffs and reorganizations, respectively, refer specifically to corporate securities. In most cases, a cryptocurrency will not be considered a security. Nonetheless, investors taking this position would not immediately recognize income on the new cryptocurrency received and would instead split the basis tracked in the original cryptocurrency between the two using the respective market values following the split using the best available data.

A third approach that has been suggested is to apply a zero basis to the new cryptocurrency. The rationale behind this approach is that although the new cryptocurrency may be a new asset, the volatility of the cryptocurrency market makes assigning a market value immediately to it difficult. In a letter to the IRS requesting guidance on hard forks, the American Bar Association Section of Taxation also pointed out that there is no guarantee a market will develop for the new cryptocurrency produced by a hard fork. These factors could yield the conclusion that the true market value of a new cryptocurrency immediately following a fork is zero. This creates no taxable income and establishes a zero basis even if the hard fork is deemed to be a taxable transaction.

In practice, CoinMarketCap data suggest that available market value data indicated that 1 BTC was valued at $5,525 and that one Bitcoin Gold (BTG) was valued at $143 on the first day of exchanges following the BTC/BTG hard fork on Oct. 25, 2017. If a sample investor held one BTC with a basis of $4,500 at the time of this fork, this investor would need to take one of the positions above to establish an adjusted basis in the BTC held and to establish a basis in the BTG acquired. Under the first scenario, the BTG would be fully taxable when received, so the sample investor would maintain a basis of $4,500 in BTC and start with a basis of $143 in BTG. Under the second scenario, this investor would conclude that 97.5% of the value was retained by the BTC in the hard fork and apply the basis of $4,500 accordingly, resulting in a basis of $4,386 in BTC and a basis of $114 in BTG. Under the final position, the investor would maintain a basis of $4,500 in BTC and a basis of $0 in BTG. Regardless of the path chosen, it would be advisable for investors to take the same position for all hard forks to avoid the perception by the IRS that they are "cherry-picking" favorable tax positions.


Another transaction unique to cryptocurrency is the airdrop. An airdrop occurs when certain users of a blockchain project receive an additional cryptocurrency as a reward for participating in the project or as a marketing initiative. For the purposes of discussing basis in cryptocurrency, this type of receipt is much less ambiguous than the hard fork. An airdrop is almost certainly classified as income and will receive a matching basis treatment. An investor receiving an airdrop will record ordinary income based on the market value of the cryptocurrency received and use that same amount as the basis in the airdropped cryptocurrency.

Adopting a thorough and consistent method

Overall, cryptocurrency is still an emerging asset class with a largely undefined tax framework. As a result, little authoritative guidance is available for investors with respect to basis tracking. Thus, investors should adopt a method that is both thorough and consistent based on what is known about current tax law, until further guidance becomes available from the IRS.

AICPA requests guidance

On May 30, the AICPA sent a letter to the IRS requesting guidance on the tax treatment of various virtual currency transactions.



Anthony Bakale is with Cohen & Company Ltd. in Cleveland.

For additional information about these items, contact Mr. Bakale or

Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd.

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