Introducing students to the tax implications of using digital currency for purchases sometimes brings surprises.

Kerry Inger, associate professor in the School of Accountancy at Harbert, recently published “Taxes: Taking a Bite out of Bitcoin” in Issues in Accounting Education Teaching Notes. Inger and Assistant Professor Mollie Mathis use this tax research case to introduce students to virtual currency taxation issues.

“I have used the case in my graduate tax research class three times and am using it again this fall,” Inger said. “It is a great way to expose students to virtual currency, which is becoming more and more important in our economy. We use three taxpayers to illustrate a variety of virtual currency tax issues – a Bitcoin miner, a short-term investor and a long-term investor.”

This allows her and other instructors implementing the research to assign individuals or groups to one or more of these scenarios.

The study finds there is a dearth of primary authority on virtual currency transactions.

“There is limited guidance from the IRS about virtual currency and Congress has not passed any laws in the area, so students must look to other types of transactions for guidance on the tax consequences of virtual currency transactions,” Inger said. “For example, students are familiar with classifying activities for tax purposes.

In this case, they must classify whether a transaction is classified as a business activity that is subject to income
and self-employment tax or an investment activity that is subject to capital gains tax.”

The case learning objectives are critical thinking, technical knowledge, tax research proficiency and written communication skills. The students in the case identify relevant tax-related issues, conduct tax research and prepare a research memorandum that summarizes their findings.

“Students are surprised that using virtual currency to purchase an item can trigger taxable income if the value of the bitcoin used to make the purchase has increased since its acquisition,” Inger said. “Many of our students are interested in virtual currency and enjoy learning more, and it is good experience dealing with complicated transactions such as ‘forks’ and ‘airdrops.’”

(Editor’s note: A “fork” is a change in blockchain protocol. An “airdrop” is essentially the cryptocurrency equivalent of getting a coupon for a free sample of a product.)

Inger’s and Mathis’s research — and their commitment to educating students on the taxation issues surrounding it — may prove especially valuable if the use of cryptocurrency expands.