Bitcoin and Other CryptoCurrencies

Nottingham CPA PC provides financial, tax and accounting solutions to those in the CryptoCurrency World. At Nottingham CPA PC, we look at client investments with a long-term perspective in order to better evaluate and realize their potential value. We know the specific challenges of this world and the standard tax implications advised by the IRS.

We help our clients tackle the most common issues cryptocurrency traders and hodlers face during acquisition, holding, and selling.

Bitcoin and all other cryptocurrencies are taxed as personal property. The IRS has realized the gains in the market and in 2014 issued Notice 2014-21, which gave them the power to impose taxes on virtual currencies.

How is Your Digital Coin Wallet Taxed?

Digital currencies don’t fall under “covered security” in the tax code, so a Form 1099-B won’t be generated like you would see with traditional stock trades from your investment broker. Presently, there are several solutions that are entirely about cryptocurrency trading. CoinTracking.Info  and Bitcoin.Tax are making it easy for coin traders to report their gains and losses to the IRS. Most digital coin markets, such as Coinbase, make it possible to export transactions into a readable solution such as a spreadsheet or PDF. After the close of the year, you can use this to fill out Form 8949.

In the world of crypto it is often hard to decipher WHEN you recognize a taxable event and for HOW MUCH.


Calculating a gain or loss — gains and losses are calculated based on each and every transaction upon a realization event.

Cost basis — keep track of all of your fees. Each transaction of crypto carries are fee, whether it’s the original buy or exchanging between wallets. Keep track of these fees and add them to the basis of the coin.

Choosing a cost method — The IRS generally likes to see you recognize a basis in the order in which you bought the underlying asset (FIFO). However, it is normally acceptable to choose between a few alternatives. The main takeaway is when you choose a method, that you stick with it. Consistency is key.

FIFO – “First in, First Out”

LIFO – “Last in, First Out”

Average Cost Basis

Gifts — If you received bitcoin as a gift then your cost basis is the same basis as it was in the hands of the donor (the person who gifted it to you). However, if the donor’s basis in the coin was higher than the fair market value at time of gift, then you would use the lower value (the fair market value). You aren’t allowed to gift a coin with a built-in loss and later have the donee recognize that loss. Remember, however, that the basis is considered at the time of sale, therefore, you will need to keep track of both the fair market value at time of gift and also the donor’s basis. Gifting can definitely get tricky with some additional rules, so consult your accountant to help you figure this out.


Realization — Gains and losses are taxable in the year they are realized. Realization occurs when you exchange your coins. This not only includes exchanges for fiat (i.e., U.S. Dollar), but also includes exchanging one coin for other coins.

Buying products with bitcoin — It doesn’t make a difference if you’re exchanging your coin for another coin or simply buying a pizza, it is a taxable event and subject to capital gains taxes.

Exchanging bitcoins for altcoins — I’ve seen a lot of discussion on this topic and it is general consensus that Section 1031 of the U.S. Tax Code does not apply to exchange of coins as a “like-kind exchange.” There is an argument to be made that it is applicable for years before 2017, but the new tax bill passed to take effect in 2018 put this issue to rest. No “like-kind exchange” whatsoever for personal property after January 1, 2018.

Transferring coins to a wallet — this is not considered a taxable event. It is simply moving your coin from one wallet to another. It is analogous to moving your GE stock from Charles Schwab Brokerage to Fidelity Brokerage.


Combine all gains and losses – remember at the end of the year, you combine all of your gains and losses. Only if you had more losses than gains would you have a “net loss.” If your total capital loss on your tax return is greater than $3,000 then you are capped at that number and any additional amount is carried forward to subsequent tax year.

Essentially there are four categories for capital transactions: (1) short-term gains, (2) short-term losses, (3) long-term gains, and (4) longer-term losses. Basically, you have four scenarios that can occur:

Long-term gain with short-term gain
The long-term gain gets the preferential rate of 10% to 20%, depending on your tax bracket. The short-term gain is taxed with your other income at your marginal rate.

Long-term loss with short-term gain
We have two scenarios here. (1) If the short-term gain is larger than the long-term loss, you have a net short-term gain — taxed at your ordinary marginal rate. (2) If the long-term loss is bigger, you have a net long-term loss. Up to $3,000 can be used to offset other kinds of income. Any unused amount will carry forward to the following year as a long-term loss.

Long-term gain with short-term loss
Again we have to consider two scenarios. (1) If the long-term gain is bigger than the short-term loss, you have a net long-term gain and get to take advantage of the favorable capital gains rates for the net gain. (2) If the short-term loss is larger, it is a net short-term loss. Just like the previous situation, you can use up to $3,000 of that loss against other types of income, with any balance carrying forward to the next year as a short-term loss.

Long-term loss with short-term loss
If the total of the two losses is less than $3,000, then you can use that loss against other types of income. But what if the total loss is more than $3,000 and some must be carried over to next year? Is the carryover short-term or long-term? It will never be just short-term but could potentially be a combination of the two. This is because you must use the short-term losses first.

If your short-term losses are more than $3,000, you use the first $3,000 to offset ordinary income, then carry the remaining short-term loss along with all of the long-term loss over to next year. If the short-term loss is less than $3,000, you can just total the two losses together, take the $3,000 off, and the balance is a long-term loss carryover to the following year.

So, the process for determining the long-term or short-term character of your capital gains and losses can be summarized in three steps:

Net your long-term items together.

Net your short-term items together.

Determine which of the above four situations applies to you.


A “wash sale” occurs when a security is sold for a loss and then re-purchased within 30 days. When this occurs, the “loss” is disregarded. There is no specific guidance as of this writing, but it does not appear that “wash sales” apply to the sale of bitcoins.

Be wary that there is such a thing as the Economic Substance Doctrine that states if a transaction does nothing other than generate a tax benefit then it is invalid. Basically, it is saying that if you use a sale of bitcoin purely to create a loss, then the loss is disallowed. There is no clear way to avoid this doctrine but due to the volatile nature of bitcoin, it is likely that a 30-day holding period is not necessary to avoid the Economic Substance Doctrine.


It is up to the investor to keep sufficient records. This would include cost basis and holding periods. Many exchanges make this information available to you. Failing to keep proper records can result in the IRS assessing a $0 basis to your crypto sales.


So far we’ve discussed how buying and selling crypto should be treated as a capital gain. But what if you mine coins or buy and sell as your primary job?

Mining — The IRS has ruled that mining for coins is considered income. For instance, if you mined 1 BTC in 2014 for $500 then you would have $500 of income. This would also be your basis in the coin for later sale.

Ordinary income or capital gain — whether the mining income is to be treated as ordinary income or a capital gain is a facts and circumstances exercise. Does your level of activity to mine reach the level of a “trade or business”?

Expenses — there is potential to deduct direct and indirect expenses associated with mining for bitcoin. These expenses can be used to offset the ordinary income recognized. In order to take the expenses, you would need to determine that your mining activity rises to the level of an ordinary trade or business.

Receipt of bitcoin for services — If you received bitcoin as payment for a trade or service, then it is considered income and subject to ordinary tax rates.

Day Trading — there are special rules for day-trading securities. However, bitcoins aren’t yet considered a security. And without further guidance from the IRS, we currently have to treat day-trading bitcoins as a regular investor.


Under U.S. tax law, you are required to file a FinCEN 114 (FBAR) if at any point during the year your foreign financial accounts aggregated a value above $10,000. Technically, cryptocurrencies are potentially subject to this filing requirement. Failure to file can lead to serious tax assessments.

Paper wallets — There isn’t clear guidance by the federal government on whether crypto wallets are subject to the FBAR reporting requirements. It is probably safe to say that they are not subject to these requirements if held within the United States.

Foreign exchanges — Again, there is no clear guidance here. I would advise my clients that holding crypto in a foreign bitcoin exchange would be subject to potential foreign reporting requirements.