IRS Wants Crypto Information from Foreign Countries

Last week during testimony to the Senate Finance Committee (SFC), US Internal Revenue Service Commissioner (IRS) Charles Rettig stated that Congress needs to provide clear statutory authority in order for the IRS to collect information on cryptocurrency transfers valued over US$10,000.  It is believed that such transfers are generally not being reported.

Cryptocurrency market capitalization tops US$2 trillion, involves over 8,600 worldwide crypto exchanges and use of crypto is believed to be a major contributor to the US tax gap. Commissioner Rettig said that most virtual currency transactions are specially designed to stay off the tax radar screen.  Obviously, this makes it impossible for the IRS to enforce the tax laws when it comes to crypto.

The IRS does not want to be challenged if it issues regulations mandating crypto reporting and Commissioner Rettig seeks to avoid just that. He explained to the SFC:  “We get challenged frequently, and to have a clear dictate from Congress on the authority for us to collect that information is critical.”  Clearly,  Commissioner Rettig is pushing the President’s agenda to smooth the passage of new laws by Congress.  I recently blogged about the Biden Administration’s economic agenda. A big part of it involves strengthening taxpayer compliance by increasing what must be reported to the IRS about client accounts by third party financial institutions and similar entities. The President’s proposal would require information reporting on both business and personal financial accounts and it would cover foreign financial institutions and US crypto asset exchanges and custodians.

IRS Wants to Get Crypto Information from Foreign Governments – How?

The Biden Administration proposal includes a new requirement that cryptocurrency transfers of $10,000 or more be reported to the IRS in much the same manner as is currently done by US banks reporting cash transfers of that amount and US brokers reporting securities transactions to the IRS. Remember, the US government cannot force a foreign crypto exchange to undertake such reporting (let us assume the exchange cannot be treated as a so-called foreign financial institution or “FFI” and therefore FATCA does not apply to such exchanges).  Absent such reporting by foreign exchanges, the rationale behind the Administration’s proposal is to strengthen the relationships the US has with foreign countries under information exchange via its vast treaty network.  If the US government has loads of information on crypto transactions effected by foreigners on US exchanges (even if the crypto account is held through entities), the foreign country may be more willing to give information to the US about US taxpayers with crypto in the foreign country. Reciprocal tattle-taling is the name of the game here. In order to enforce its own tax rules when US taxpayers try to cheat offshore, the US must have the ability to reciprocate by exchanging comparable information with the foreign government.

If the experience of FATCA is anything to go by, the foreign countries may end up getting the short end of the information stick. Let’s watch this space!

The Administration summarized the proposal (at page 94):

“The proposal would expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. This would allow the United States to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on U.S. taxpayers that directly or through passive entities engage in crypto asset transactions outside the United States pursuant to a global automatic exchange of information framework. The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker. The proposal, if adopted, and combined with existing law, would require a broker to report gross proceeds and such other information as the Secretary may require with respect to sales of crypto assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners. The proposal would be effective for returns required to be filed after December 31, 2022.”

No place to hide.  The trend toward global tax transparency continues.

Posted June 24, 2021

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