Jonathan Miller recently came to you, the tax advisor, to seek some tax advice. Jonathan is

digital currency enthusiast. His journey into the world of cryptocurrencies had been an

adventurous one, filled with highs and lows. As the year$-$end approached, he heard from his

friend Bill that his dealings with cryptocurrencies have tax implications. He is getting concerned

as over the years, his transactions had grown increasingly complex. He recognized that the

intricate nature of his cryptocurrency transactions required expert guidance to ensure compliance

and avoid any unintended tax consequences.

Sitting in your office, Jonathan looked both intrigued and somewhat anxious. The prospect of

falling afoul of tax regulations in the ever$-$evolving world of cryptocurrency had prompted him

to take action. With a deep breath, Jonathan began to recount his crypto journey.

Jonathan's journey into the world of cryptocurrencies began back in $2015$ when he was

introduced to Bitcoin by his friend Bill. At that time, Bitcoin was priced at around $$250$ per coin.

Intrigued by Bill's enthusiasm and predictions of a bright future for Bitcoin, Jonathan decided to

invest $$2,500,$ acquiring $10$ Bitcoins. Since then, Jonathan closely monitored the cryptocurrency

market. By $2019,$ Bitcoin had reached $$10,000$ per coin. Encouraged by the impressive gains, he

bought an additional $5$ Bitcoins for $$50,000.$ He also diversified his holdings by participating in

the initial coin offering $($ICO$)$ of "EtherWave", a promising blockchain project. In the ICO, he

acquired $10,000$ EtherWave tokens for $$10,000,$ aiming for future appreciation.

Jonathan looked at you, his tax advisor, with a furrowed brow and asked the pressing question

that had been on his mind. "Since I've acquired different types of cryptocurrencies in different

years," he began, "I've been wondering about the tax costs associated with my crypto holdings.

I've heard the term 'tax basis' being thrown around in conversations with my friend Bill. Could

you help me understand what exactly the tax basis of my cryptocurrencies is and how it would

impact my tax obligations?"

Jonathan continued to share his cryptocurrency journey, highlighting the challenges he faced in

the turbulent world of digital assets. Unfortunately, the value of EtherWave tokens did not

perform as expected, and $2022$ proved to be a challenging year for the cryptocurrency market.

Bitcoin, which had previously soared, experienced a significant decline of more than $60\%.$

Meanwhile, the "EtherWave" project encountered regulatory issues, leading to a substantial drop

in the value of Jonathan's $5,000$ tokens. Recognizing the unfavorable situation, he decided to sell

his entire EtherWave token holdings for $$1,000,$ incurring an additional $$100$ in transaction fees.

This experience provided a valuable lesson on the volatility inherent in the cryptocurrency

market. As he reflected on the significant loss he had incurred, Jonathan turned to you, the tax

advisor, with a thoughtful question in mind: "I had a substantial loss on my EntherWave tokens.

What is the character of this loss, and how does that impact my taxes?"

Faced with this market turmoil, Jonathan decided to cash in on some of his Bitcoin holdings in

$2022.$ He used $3$ Bitcoins with a fair market value of $$71,000$ to purchase a new Tesla Model Y$,$

incurring a $$500$ transaction fee. He turned to you, the tax advisor, with an important question in

mind: "Does the purchase of the Tesla Model Y using Bitcoins have any tax consequences, and if

so$,$ how much tax am I subject to on this transaction?$$

As the year drew to a close, Jonathan began contemplating the possibility donating $1$ bitcoin to a

charitable organization focused on providing clean drinking water to underprivileged

communities. This charitable organization was a registered $501($c$)(3)$ entity. Jonathan asked: $"$If I

donate one Bitcoin before year$-$end, can this be considered my charitable contribution deduction?

If so$,$ how much will be shown on my donation receipt?"

Jonathan was also exploring the potential of contributing Bitcoins to his self$-$directed Individual

Retirement Account $($IRA$).$ With a sense of curiosity and a quest for financial planning, he asked,

"I can contribute Bitcoin to an IRA, is that correct?"

Requirement

Conduct a tax research to identify the tax issues related to Jonathan$$s Bitcoin activities. You

need to prepare $1)$ an internal memo to document your research findings, and $2)$ an email draft

response to your client.

Please note that the memo should include an analysis and conclusion about the proper tax

treatment of each of the identified issues. Include primary authorities to support the suggested

conclusion as well as any authorities that are contrary to this position, if any.