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. Please follow the tax memo rubrics closely to ensure that your cover all required elements. (Note that Bitcoin is a new technological development that does not have specific primary authority. You will need to relate existing primary authority to a new setting.

IRS Guidance: https://www.irs.gov/businesses/small-businesses-self-employed/digital-assets)