Internal Revenue Service (IRS) commissioner Charles Rettig announced that the IRS plans to issue further guidance on the taxation of cryptocurrency. Commissioner Retting wrote that “We have been considering these issues and intend to publish guidance addressing these and other issues soon.” Can it be? Is an “IRS rescue” really on the way? Will it be a rescue?
American taxpayers and their representatives have been seeking clarity on this issue for a number of years. It’s been over a decade that the IRS has been asked for better guidance and further clarification on the myriad tax issues surrounding the use of cryptocurrency. Maybe, at long last, the IRS will provide it. Here is a bit of background so you can see how the matter has festered.
Following a 2008 recommendation by the National Taxpayer Advocate to issue guidance on the tax treatment of the transfer of digital items and currency, the IRS created a web page. The web page stated the agency had already “provided guidance on the tax treatment of bartering, gambling, business and hobby income — issues that are similar to activities in online gaming worlds.” As if that was a big help! No rescue! No joy!
In 2013, both the Government Accountability Office (GAO) and the Taxpayer Advocate Service again urged the IRS to issue further guidance on the use of cryptcurrency. See, Government Accountability Office (GAO), Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks, GAO-13-516 (May 2013); Taxpayer Advocate Service, 2013 Report to Congress, Volume 1 DIGITAL CURRENCY: The IRS Should Issue Guidance to Assist Users of Digital Currency (MSP #24, 2013). In response, IRS issued Notice 2014-21 stating that virtual currency is to be treated as “property” and not “currency” for US federal tax purposes. Even though virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — it did not have legal tender status in any jurisdiction until April 1, 2017 when Japan declared Bitcoin as a legal tender or payment method.
In 2017, US Representative Kevin Brady and other congressional lawmakers wrote to the IRS requesting that the agency provide some definitive guidelines as well as a comprehensive virtual currency strategy that would be less confusing to taxpayers than the current rules. Clarity was viewed as most important in light of the fact that the IRS had been cracking down on individuals and businesses using cryptocurrency without reflecting them in their tax returns. The IRS successfully required Coinbase to disclose the account records of over 14,000 customers whose Bitcoin transactions exceeded $20,000 per annum and stated that the information will be used to identify and obtain evidence on individuals using Bitcoin to either launder money or conceal income. (You can read more on the Coinbase matter here and here).
Sadly, we don’t have much tax guidance to date on the use of cryptocurrency. My earlier blog post details the US tax implications of cryptocurrency as well as the current IRS guidance. FBAR issues with regard to cryptocurrency are another matter altogether. My blog post here, discusses the FBAR issues.
The Overseas American and Crypto
Americans living and working abroad may find it difficult to maintain a bank account in their country of residence due to the infamous “Foreign Account Tax Compliance Act”, FATCA. These individuals may more frequently turn to crypto-currency to handle payments as more and more goods and service providers are becoming happy to accept it.
Unfortunately, Americans overseas are already in the IRS cross-hairs with respect to their foreign assets or accounts. Adding crypto to the mix, just makes matters more precarious. I understand that in an attempt to track digital currency transactions, the IRS has entered into a license agreement to use software to identify the owners of digital wallets. These developments clearly indicate that the area is heating up and definitely should be handled with care.
Now more than ever, guidance is needed on cryptocurrency. Let’s hope the IRS is not making an empty promise.
Posted May 22 2019
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