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Selva Ozelli: How should cyptocurrency bribes be valued?

At the federal level in the United States, cryptocurrencies have a lot of regulators — FinCEN, OFAC,  the IRS, the Commodity Futures Trading Commission (CFTC), and the SEC among them. 

These regulators characterize cryptocurrencies respectively as money, property, commodities, and a security.   

The multi-classification of cryptocurrencies and their use in bribery transactions could trigger a number of questions about valuations and risks under U.S. and other anti-corruption and tax regimes. 

Here is an example: A U.S. public company bribes a foreign official with a ZTE phone that serves as a cryptocurrency miner as well as a cryptocurrency wallet. This allows the foreign official to mine Ethereum (ETH) on a need-be basis, to sell the mined ETH on a foreign crypto exchange, and to submit to the company a very large electricity bill for reimbursement for mining activities, in exchange for pursuing business in the foreign country.  

This so-called “new bribe” eliminates the need for bankers, accountants, lawyers, consultants and other middlemen. It also differs from the traditional FCPA bribery scenarios via hidden slush funds denominated in fiat currencies. The new bribe doesn’t involve non-disclosed offshore intermediary entities or bank accounts or shame consultancy contracts.

The new bribe (something of value) nevertheless creates the apparent basis for an FCPA violation. And if it is deducted for U.S. tax purposes, it subjects the bribe-payer company to numerous fines and penalties.

But let’s look deeper into questions about how to value the new bribe.

Users of ETH can obtain it by exchanging it for fiat currencies or Initial Coin Offering tokens, or by “mining,” which is the process of having computers compete to solve complex mathematical problems.

The IRS said recently that when a taxpayer successfully mines virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. This implies that ETH mining is akin to a service activity. Therefore, it is appropriate to treat the costs of mining virtual currency similar to expenses incurred in providing other services which are expensed as paid or incurred.

A letter from the American Institute of Certified Public Accountants or AICPA to the IRS suggests that cryptocurrency mining should be treated as ordinary income in the year it is mined, and the expenses of mining deducted as incurred. AICPA argues that the matching of income and expenses are consistent with other service activities. In addition, any crytpocurrency mining equipment — like the ZTE ETH miner/wallet phone — should be capitalized and depreciated like any other property whose useful life extends beyond one year.

Some cryptocurrencies like ETH are traded on centralized exchanges that operate in jurisdictions outside the United States. The exchanges are either a pure virtual currency exchange or a virtual currency exchange which allows virtual currencies to exchange into fiat currencies. These foreign virtual currency exchanges have custody of customers’ virtual currencies, and an exchange failure results in the loss of customer funds.

AICPA’s letter to the IRS suggests that taxpayers should report the value of cryptocurrencies and fiat currencies held at foreign exchanges for Report of Foreign Bank and Financial Accounts (FBAR) and Foreign Account Tax Compliance Act (FATCA) purposes if they meet the necessary threshold, but not when a taxpayer holds cryptocurrency in a wallet— such as a ZTE ETH miner/wallet phone — which the taxpayer owns, controls and is in possession of a private key.

That reasoning would suggest that a ZTE phone enabled for ETH mining and wallet functions has only the intrinsic value of the phone itself, and nothing more.


Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.

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