Cyptocurrency (such as Bitcoin) is a type of virtual currency. This is an emerging area and consequently transactions involving use of crypto come with an enormous amount of US tax uncertainty. The Internal Revenue Service (IRS) has taken a keen interest in virtual currency since its use provides a way for taxpayers to avoid tax (either with or without nefarious intent).
The latest IRS guidance came to us on October 9, 2019 when the IRS issued Revenue Ruling 2019-24. The Ruling (which is thoroughly dissected here and here) provided long-awaited information about the tax treatment of certain cryptocurrency events – specifically, “hard forks” and “airdrops”. The Ruling appeared in the Internal Revenue Bulletin (IRB) 2019-44 dated Oct. 28, 2019. Simultaneously, with issuance of the 2019 Revenue Ruling, the IRS updated its webpage Virtual Currency Transactions frequently asked questions in order to reflect it.
Internal Revenue Bulletin – If it’s Not There – It Means Nothing
Readers of my blog know that the Internal Revenue Bulletin (IRB) is the ONLY “official source” for IRS information. Once the IRS posts information in the IRB, it means you can rely on it! According to IRS officials, only guidance published in the IRB is binding on the IRS and can be relied upon by taxpayers as authoritative. IRS FAQs are typically not published in the IRB, and indeed the Virtual Currency Transactions FAQs were not so published. As discussed below, the IRS is taking some heat for this omission and for failing to point out its ramifications to taxpayers and their advisors.
Crypto FAQ Guidance (2019) Was Not Published in the IRB
The Government Accountability Office (GAO), just issued its report (Report) Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance on February 12, 2020. The Report points out that “[p]art of the 2019 [virtual currency] guidance is not authoritative because it was not published in the Internal Revenue Bulletin (IRB),” GAO said. (italics mine). GAO went on to remind and warn that “IRS has stated that only guidance published in the IRB is IRS’s authoritative interpretation of the law. IRS did not make clear to taxpayers that this part of the guidance is not authoritative and is subject to change.” It went on to add that “For FAQs not published in the IRB, tax practitioners have noted that sometimes IRS has included a disclaimer noting that the FAQs do not constitute legal authority and may not be relied upon. The new virtual currency FAQs do not include such a disclaimer.”
GAO recommended that the IRS update the 2019 FAQs to make clear that they may serve as a source of general information but cannot be relied upon by taxpayers as authoritative. IRS disagreed with this suggestion. (See Appendix II of the GAO Report, which in responding to the recommendation included the statement “IRS does not take positions contrary to public FAQ’s”). Please take this IRS statement with a grain of salt, see below!
Relying on such non-authoritative and somewhat “unofficial” IRS FAQ guidance can, and has, caused a multitude of problems for taxpayers. This was encountered in the IRS Offshore Voluntary Disclosure Program (OVDP) under which taxpayers and their advisors relied on a series of IRS FAQs which were updated without notice amidst great agency secrecy. So severe were the problems with the use of these non-authoritative FAQs for OVDP, that the IRS was accused by the Taxpayer Advocate Service (2011 Annual Report to Congress) of “bait and switch” tactics. Apparently, the IRS has taken positions contary to public FAQ’s.
Finding the IRB
The IRB is special because information published in it has gone through a multi-step clearance process at both the Department of the Treasury and the IRS. The clearance process involves review and approval by officials in a wide variety of Treasury and IRS offices. Given the importance of the IRB, taxpayers may want to become more familiar with it. The IRB is published weekly by the IRS. It can be found here and here.
You can also subscribe to IRS e-news for email updates. If you look on the left corner of the news that the IRS sends you there is a menu containing a link to the IRB. That might remind you to look for it weekly. To subscribe please go to the e-News Subscriptions page on the IRS Web site. You can subscribe to the IRS Guidewire here.
IRS Told that More Guidance is Needed
The GAO Report admonished that IRS could do more to help taxpayers comply with their tax obligations concerning use of cryptocurrency. It pointed out that some US-based virtual currency exchanges report only some virtual currency transactions, but not all are being reported and there is inconsistency in the approach. Taxpayers may therefore lack the necessary information making them aware of a reporting obligation. GAO recommended that the IRS take action to increase third-party reporting on taxable transactions involving virtual currency. IRS agreed with this recommendation, so you can expect to see virtual currency exchanges having to comply with third-party reporting rules in the near future.
Another suggestion was made that the IRS should clarify the application of reporting requirements under FATCA to virtual currency. The IRS disagreed with this at the current time, but stated it may be appropriate in the future.
FBAR Reporting and Virtual Currency in an Offshore Account
It was also suggested that IRS and the Financial Crimes Enforcement Network (FinCEN) should make a statement about the application of foreign account reporting requirements under the Bank Secrecy Act (the notorious FBAR, Form 114) to virtual currency. In Appendix III to the Report, a letter dated January 22 2020, from the FinCEN Director noted that FinCEN agreed with this suggestion and stated that it would work with the IRS on this issue. Significantly FinCEN also stated: “Currently the FBAR regulations do not define virtual currency held in an offshore account as a type of reportable account. For this reason, at this time, virtual currency held in an offshore account is not reportable on the FBAR.” Good to know, but keep this on your radar as the regulations may change!
Posted February 27, 2020
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