Question

Prepare a memo answering the clients' concerns:

Our clients purchased 100 Bitcoins for a total of $50,000 in 2013. Bitcoins are now worth $7,500 each, after reaching a peak of over $17,000. The husband thinks they should consider selling now, before the Bitcoin market bottoms out. The wife is concerned with paying capital gains tax on so much money and wonders about making a significant charitable contribution but agrees that they should sell the Bitcoin.

Our client is comfortable gifting $250,000 to charity but cannot agree on where to make the contribution. The husband doesn’t think it will save them that much in taxes and worries about making significant donations in one year. He’s heard good things about setting up a private/non-operating family foundation and wonders if that is a good way to spread out the contributions over several years. The wife wishes to donate it to their high school alma maters, public schools in Ohio.

Please prepare a memo making a recommendation on how our clients should structure their contribution in order to receive the best tax advantage, including a projected tax liability assuming the Bitcoins are sold in 2019. You can find their 2018 tax return in their permanent file, and assume future income, deductions, withholdings – except for the sale of the Bitcoin – will remain the same.

Answer 1

Exhibit A : What this means: Capital gains tax doesn’t arise on the mining of bitcoins.

What you can do: Till the time there is no concrete provision, you can list your Bitcoin wealth, as income from other sources (the 5th head.)

Exhibit B : When you’ve held Bitcoins as an investment
Investment in bitcoin has seemed to be the safer idea for the lot who doesn’t have direct access to buying bitcoin. With the fluctuations in the price of Bitcoin, investment in this cryptocurrency has become a very lucrative way to earn profits from the difference in prices of Bitcoin as a result of market fluctuations. It is in this case that tax on bitcoin will come under the 3rd head, i.e. “income from capital gain.”

Investments are either long term or short term. The dividing line for investments in Bitcoin is 3 years :

1. If the period for which you are holding your bitcoin is more than 3 years, the investment is long term. In this case, you shall be charged 20% tax. The benefit of indexation will be applicable as per the Income Tax Act, 1961.
2. If the period for which you are holding your bitcoin is less than 3 years, the investment is short term. In this case, you shall be taxed at the individual slab rate

If it was taxed under capital gains:

initial investment = $50000 sale value = $ 7500*100=$750,000 the bitcoins are hold for than 3 years then its taxable at @20% There fore, taxable value = $ 140,000.

There fore the client should contribute the amount equal to taxable value to escape from the tax.

so, the client has to contribute $140,000 for claiming deductions.

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