Got Crypto? IRS Ramping Up Enforcement Efforts

At the American Institute of CPAs National Tax Conference on November 13, 2018, IRS Commissioner Charles Rettig noted that efforts are under way in the IRS to quickly disseminate informal guidance relating to the tax treatment of cryptocurrency transactions and to prioritize enforcement efforts against taxpayers who fail to comply.  An October 2018 report of the IRS Commissioner’s Information Reporting Advisory Committee identified significant open issues, including:

  1. Whether cryptocurrency held for investment is a capital asset;
  2. Whether the cryptocurrency ought to be treated as a security, subject or not subject to the wash sale rules, or affected by mark-to-market implications under Section 475 of the tax code;
  3. Whether a taxpayer may use LIFO or FIFO to determine the basis of cryptocurrency sold;
  4. How to track basis through activities in the blockchain;
  5. Whether broker reporting is required under Section 6045 for transactions using cryptocurrency;
  6. Whether a taxpayer may contribute cryptocurrency to an IRA;
  7. Whether cryptocurrency should be considered a specified foreign financial asset; and
  8. Whether virtual currency is a commodity.

The IRS's only formal cryptocurrency guidance to date has been Notice 2014-21, which provides that cryptocurrency constitutes property, not currency, for U.S. tax purposes. The IRS also released a statement in November 2018 reminding taxpayers that the Tax Cuts and Jobs Act confined like-kind exchange treatment to real estate. (Prior to the Tax Cuts and Jobs Act, many taxpayers believed that exchanges of one type of cryptocurrency for another might qualify for like-kind exchange treatment under Section 1031.)

The IRS has been expanding enforcement efforts on multiple fronts. In 2016, it requested account information on all U.S. customers of Coinbase who transferred Bitcoin on Coinbase from 2013 to 2015 (Coinbase, Inc. is one of the largest U.S. cryptocurrency exchanges). The IRS’s request has since been granted in part by the U.S. District Court for the Northern District of California and the IRS has already been cross-referencing the taxpayer information gathered from Coinbase against other taxpayer information in its possession. In July 2018, the IRS announced that it joined a tax enforcement and information sharing alliance, known as the Joint Chiefs of Global Tax Enforcement (J5), with the United Kingdom, Canada, the Netherlands, and Australia to combat international tax crime and money laundering (with a main area of focus being cybercrimes and cryptocurrencies). Also in 2018, the IRS reminded taxpayers to report virtual currency transactions in order to avoid audits and potential criminal prosecution. Consequences to taxpayers include penalties, interest, fines and potential incarceration.

Taxpayers and financial institutions transacting in, or facilitating transactions in, cryptocurrency should be actively assessing their potential tax exposures and compliance requirements and monitoring IRS guidance as it is released.

 

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