Investment in Bitcoin & Token Packages

An Insider s Tax Guide For Investment in Bitcoin & Token Packages Date of publication: April 10, 2018 All rights reserved. No part of this Guide may be used, reproduced, shared or distributed in any manner without written permission from the Author and Crypto Tax Advisors, LLC. Purpose of the Guide The purpose of this tax guide is to provide the Author s view on U.S. federal tax treatment for investment in a certain Bitcoin package ( BCP ) and Token package ( TKP ) offered by a Company described below. The target audience of this Guide is Investors who had bought BCP and/or TKP from the Company. We cannot name the company due to legal reasons. In fact, the name of the company is not important, what matters is the nature and features of the products in question. If you are investing in a product that is similar to what we discussed in this Guide, you can probably apply the same tax treatment regardless of whether you are investing in the same Company that we are discussing in this Guide or not. i

Company and product history In its original agreement, the Company promised to give a total of 140% return to every BCP Investor, with a daily payout between 0.75% to 1.25%, five days a week (Monday to Friday). The Company also allowed each Investor to rebuy BCP with payout from the original BCP purchased by the Investor, and each rebuy was entitled to the same 140% total return that the original BCP was having. Investors could also withdraw their BCP payout or leave it in their account wallet with the Company, instead of doing rebuy. Both purchases and payouts were made in Bitcoin, and withdrawals were made in Bitcoin as well. In early January 2018, the Company suddenly announced that they needed to stop operations in the United States and Canada due to fraudulent activities conducted by some distributors (i.e. MLM marketers who were promoting the Company s products) in those two countries, and at the same time the Company also froze all U.S. and Canadian Investors accounts for the reason of conducting internal investigation. In February 2018, the Company announced that they were resuming operations in the U.S. and Canada. They also announced that because the Company had suffered a significant loss due to fraudulent activities conducted by a large number of distributors, and in order to avoid any investors from losing money on their investment, the Company decided to terminate all the existing BCP immediately and they issued a new BCP 2.0 which has similar features like the original BCP ii

(which the Company renamed to BCP 1.0 ). The Company cancelled the agreement for BCP 1.0 but promised to pay BCP 1.0 investors 100% (not 140% as in the original agreement) of their original investment cost in Bitcoin, not including any rebuys. They also promised to pay 100% of unpaid commissions earned by distributors who didn t commit fraud against the Company. The daily payout for BCP 1.0 and unpaid accrued commissions is calculated based on a formula set by the Company and is depending on the Company s daily mining net profit and income generated by the selling of BCP 2.0. In early April 2018, the Company announced for the second time that they would no longer operate in the U.S. and Canada due to active participants continuously promoting their products and services incorrectly. They also promised that they would continue to pay BCP 1.0 Investors according to the terms they previously announced. In addition to BCP, the Company also has been selling TKP since November 2017. Total supply of the token was set to 1 billion, among which 500M were to be sold internally to the Company s Investors, and the other 500M would be sold to the public and an Initial Coin Offering ( ICO ) was scheduled for the second quarter of 2018. Purchase price for each Token was set to 0.50 and all TKP purchases are payable in Bitcoin only. What problems can this Guide solve? In this Guide, you can find answers to some questions frequently asked by Investors, including but not limiting to: iii

- I heard that I must recognize a gain or loss every time when I use Bitcoin to buy something. Do I need to recognize gain or loss for using Bitcoin to buy BCP and/or TKP? If yes, how do I do the gain/loss calculation? - What is the tax consequence of receiving a payout for my BCP? Does it matter whether I withdrew it or not? - What is the tax consequence of doing a rebuy? - Do I need to recognize income when I make a withdrawal? If yes, how do I determine the income amount? - When do I need to report my referral commission and how do I calculate the amount of commission income I need to recognize? - Can I write off my investment and take a loss on my 2017 tax return because I don t believe the Company will really pay me back for my investment? - The Company kept changing their policies and payout calculations, how do I deal with that from a tax perspective? - I paid a lot of Bitcoin to buy a very expensive TKP. Do I need to report anything related to the transaction? - If the Company is terminated or it suddenly disappears before I receive 100% return of my investment, how can I take a loss on my tax return? iv

Disclaimer This Guide is for information only. It cannot be used to substitute paid professional tax advice, cannot be relied on for filing your tax return and cannot be used to avoid any tax penalty or interest. Your situation may not be the same as those described in this Guide. Please always consult your tax advisor for your specific tax situation. This Guide provides practical examples with the goal to demonstrate various tax calculation methodologies so that readers can consider and use for their calculations if they choose to. However, if you do not understand or have questions about something discussed in this Guide, please consult a professional tax advisor rather than trying to guess or attempt to make your own conclusion. Examples provided in this Guide are all fictitious. The Author tried to stay close to the actual situation as much as possible. However, since everybody s situation may be different, you should not blindly follow the examples and apply them to your situation. Consult your tax advisor whenever you are in doubt. Comments and views provided in this Guide are based upon tax reference materials, facts, and assumptions that are subject to change. The Author is not obligated to update the Guide for subsequent tax legislative or administrative changes or any change in situation described in this Guide. The Author may or may not choose to publish an updated Guide as a separate ebook if there are significant changes in tax law or regulations or situation related to the products discussed in this Guide. v

About the Author Sharon Yip is the founder of Crypto Tax Advisors, LLC. She is a CPA and a tax specialist with 20 years of experience in public accounting and corporate. Sharon has in-depth knowledge and broad experience in a variety of tax areas, and she has served various types of clients such as individuals, estate and trust, corporations and partnerships. Sharon specializes in U.S. federal taxation, but she also has hands on experience in multistate and international tax. Sharon became a cryptocurrency enthusiast in 2017. Since then she has been actively involved in cryptocurrency investment and trading. Sharon specializes in cryptocurrency tax compliance and planning and she is passionate about helping cryptocurrency investors to reduce IRS audit risks. In addition to providing tax consulting services to cryptocurrency investors and business owners, Sharon is also a personal expert coach for solo tax practitioners and small CPA firm owners, helping them to better provide traditional and/or cryptocurrency related tax services to their clients. Sharon has first-hand experience with the products discussed in this Guide. She was approached by many Investors for tax advice regarding different aspects of their investment in the Company. Seeing people s needs, Sharon decided to write this Guide to provide tax guidance to more people in a similar situation. vi

TABLE OF CONTENTS Introduction 1 2 3 4 5 6 Purchase of BCP Payout for BCP Re-buy of BCP Withdrawal of Payout for BCP Purchase of TKP Referral Commissions vii

TABLE OF CONTENTS (Cont d) 7 8 BCP 2.0 Recognition of Losses Conclusion viii

Introduction Looking back at what happened since the beginning of 2018, we can see that there were multiple changes in policies, cancellation of agreements, changes in product features and terms, and changes in daily payout amount and payment terms with regard to BCP. At this point there is no guaranteed that all the investors can really get back 100% of all their investment costs, and if yes, how long it will take. Most BCP Investors are confused about what and how much they should report on their tax return with regard to their investment in BCP. Not only because the product they invested in is having features very different than traditional financial investments, but also because many aspects of the investment are highly uncertain, due to the changes mentioned above. In addition, cryptocurrency is a new area and is still in its infancy in many ways. There is very few official guidance regarding tax treatment of cryptocurrency related activities. Also, most tax practitioners don t know how to handle cryptocurrency taxation because they have no experience with cryptocurrency and/or are not familiar with the so-called Bitcoin multiplier, the kind of product discussed in this Guide. Consequently, many 1

Investors are having the feeling of fear, frustration, confusion, anger, and sadness, because they don t know what to do with their taxes with regard to their investment and their tax service provider cannot help them. It is our hope that this Guide can provide Investors some helpful guidance which will lessen their fear and feeling of uncertainty. We hope the practical examples in this Guide will allow people to do calculations for their investment more easily. We also hope that this Guide can be used as a case study for tax professionals who are not familiar with cryptocurrency to better understand how to handle cryptocurrency investment from a tax perspective. To download a complete copy of this Guide, please visit: https://crypto-taxadvisors.com/product/an-insiders-taxguide-for-investment-in-bitcoin-token-packages/ 2