Hidden Forces – Podcast Summary

Episode: How Do Governments Tax Bitcoin? | A Crypto Tax Accountant on Filing Requirements and Loopholes

Host: Demetri Kofinas
Guest: Mark Demichel, Forensic Accountant, Citrin Cooperman
Date: January 15, 2018

Episode Overview

This episode dives into the murky and rapidly developing world of cryptocurrency taxation in the US. Host Demetri Kofinas talks to forensic accountant Mark Demichel about what constitutes a taxable event with Bitcoin and other cryptocurrencies, the latest IRS rulings, loopholes, reporting requirements, the Like-Kind Exchange debate, and the real-world implications for anyone who has profited from or transacted in crypto. The discussion offers practical insights, explores legal gray areas, and unpacks the unique challenges posed by decentralized digital assets.

Key Discussion Points

1. Mark Demichel’s Background in Crypto & Forensic Accounting

• Demichel began as a fraud and forensic accountant, which led him to cryptocurrencies due to concerns about fraud and money laundering (02:17).
• Cryptos were once considered "underground, criminal fraud type stuff," but have since become mainstream (02:29).

2. Money Laundering vs Tax Evasion in Crypto

• Demetri brings up a Florida case where a judge ruled that Bitcoin couldn’t be "laundered" because it wasn’t considered money at the time (03:07).

  “Florida subsequently passed legislation saying for purposes of money laundering, this stuff counts.” – Mark Demichel (03:27)

• Tax evasion remains a risk regardless of legal nuances; the IRS can and will pursue undeclared gains (04:03).

3. How Many People Actually Reported Gains?

• IRS data from court filings against Coinbase: only ~800–900 people reported gains on crypto between 2013 and 2015, despite over 14,000 Coinbase users selling >$20,000 of crypto (04:40).

  “800, 900 people had paid taxes across the entire universe of cryptocurrencies.” – Mark Demichel (05:10)

• There’s no public data on the total number of Americans with Coinbase-held Bitcoin, largely due to Bitcoin’s pseudonymous nature (05:25).

4. What is a Taxable Event in Crypto?

• Simply purchasing cryptocurrency is not taxable; selling it is (06:36).
• Receiving crypto as payment for goods or services is taxable, based on the USD value at the time of receipt—even if you don’t sell it (07:10).

  “My receipt of that cryptocurrency in and of itself... is still income to me because I did work and I got paid.” – Mark Demichel (07:10)

• Utility tokens (like Ethereum used as "fuel") create a huge reporting burden, since every single transaction can trigger a gain or loss event (08:14).

  “Having to report every single transaction... is extremely burdensome from a reporting requirement.” – Mark Demichel (08:14)

• This tax complexity discourages real-world use of crypto for payments (08:42).

5. The Regulatory Dilemma for Utility Tokens

• US tax law is a bigger barrier to crypto transactions than legal tender laws (08:42).
• Unlike the US dollar, users must report gains/losses for every swing in value if using crypto for transactions—an enormous compliance burden (09:32).

6. Like-Kind (1031) Exchange: Applicability to Crypto

• Like-Kind Exchange rules (1031) have traditionally allowed deferring taxes on trades of similar real estate assets (10:27).
• For real estate, the geographical location does not matter, but the value cannot be received directly in cash (11:51).
• Issues for crypto: Real estate has ample precedent, but with crypto and especially precious metals, regulatory clarity is lacking (12:32).

  “With regards to like-kind exchanges for other types of assets, it’s kind of limited. What we do have some regulation on is precious metal exchanges.” – Mark Demichel (12:32)

• Demichel points out IRS Notice 2014-21: all cryptocurrencies are considered property, which underpins current tax guidance (16:49, 17:03).
• Like-kind exchange only applies to real estate assets after 2018. Retroactive crypto trades remain a legal gray area (20:47, 21:57).

7. Hard Forks, Mining, and “Free” Tokens

• Two schools of thought:
  1. Receiving new tokens via a hard fork (e.g., Bitcoin Cash from Bitcoin) is akin to income or a dividend and is taxed as such (17:15, 18:00).
  2. Alternatively, it may be more like an asset “giving birth” (e.g., a cow and a calf) and not immediately taxable—though this is far less clear (19:27).

  “Is bitcoin cash more like finding a piece of gold buried on the beach somewhere... or is it more like the bitcoin gave birth?” – Demetri Kofinas (19:27)

• Found property is taxable; thus, “free” crypto received in a fork or similar event may trigger ordinary income tax (18:25).

8. The IRS & Blockchain Surveillance: Chainalysis

• The IRS contracts with Chainalysis, a firm specializing in blockchain analytics (23:11), to deanonymize and link wallet addresses, improving compliance enforcement.

  “They basically just monitor the blockchain on an ongoing basis, looking to form those types of relationships.” – Mark Demichel (24:38)

• Chainalysis aggregates wallet activity, links people to known exchange addresses, and can even use social network connections to unravel chains of transactions (24:38, 25:34).
• The myth that crypto is “untraceable” and useful for tax evasion is increasingly false—Bitcoin is especially transparent (25:34).

9. Finding the Right Crypto-Qualified Accountant

• Only a handful of accountants are well-equipped in crypto tax law; most don't fully understand it yet (26:33, 26:45).

  “I've talked to a lot of different accountants. Some understand this, some just don’t...” – Mark Demichel (26:33)

Notable Quotes & Memorable Moments

• On the complexity of reporting every crypto transaction:

  “Having to report every single transaction, either a gain or a loss, is extremely burdensome.” – Mark Demichel (08:14)

• On IRS’s recognition of Bitcoin as property:

  “They declared that any convertible virtual currency is to be treated as property. A lot of what I've been talking about today derives from that.” – Mark Demichel (16:49)

• On using Chainalysis for blockchain surveillance:

  “They basically just monitor the blockchain on an ongoing basis, looking to form those types of relationships.” – Mark Demichel (24:38)

• On old misconceptions about crypto and tax:

  “This false narrative, this idea that you can evade taxes through Bitcoin... is completely false.” – Demetri Kofinas (25:34)

• On how few accountants “get” crypto tax rules:

  “I see just a handful of them at these networking events here and there, but you’re right, there’s not that many.” – Mark Demichel (26:47)

• The host’s tone remains skeptical and curious, infusing the discussion with humor and candid frustration about tax complexity:

  “This is a nightmare, Mark. Honest. This is a nightmare. No wonder you guys make so much money!” – Demetri Kofinas (17:46)

Important Timestamps & Segment Guide

• Introduction & background: 00:00–03:00
• Crypto and forensic accounting origin story: 02:17
• Legal distinctions – money laundering vs tax evasion: 03:07–04:25
• Reporting on crypto gains and IRS data/court fight: 04:40–05:36
• Chainalysis & tracking crypto transactions: 05:36, 23:11–25:34
• Taxable events explained; differences between holding and receiving crypto: 06:36–08:14
• Utility tokens and tax compliance burden: 08:14–10:00
• Like-Kind (1031) Exchange for crypto: 10:02–16:22
• IRS property ruling & forks: 16:49–19:27
• 1031 exchanges restricted to real estate (2018-forward): 20:47–22:22
• Tips for finding a qualified crypto tax accountant: 26:33–27:13

Key Takeaways

• Cryptocurrency taxation remains a complex and evolving area; most taxable events arise upon sale, exchange, or receipt for goods/services.
• Like-Kind Exchange (1031) tax deferral is no longer an option for crypto, and retroactive qualification is highly uncertain.
• Even seemingly “anonymous” blockchain transactions can often be traced by the IRS.
• Only a handful of accountants are up to speed—seek out real crypto expertise before filing.
• “Free” coins from hard forks (like Bitcoin Cash) may be considered ordinary income and taxed accordingly, but legal clarity lags behind real innovation.
• The burdens of IRS reporting may impede everyday crypto utility rather than legal tender laws.

Contact Info:
Mark Demichel can be reached at Citrin Cooperman: 212-697-1000, ext. 1369. Email is available on the Hidden Forces website.

For further information, check out other episodes at hiddenforcespod.com.