IRS Guidance on Taxing Virtual Currencies Rolls out for 2019

The IRS is rolling out new guidance to compel more voluntary compliance in reporting crypto holdings.  But is this just another case for 2nd citizenship?

January 13, 2020

By: Bobby Casey, Managing Director GWP

irs tax guidance There was crypto guidance issued in the international space for the FATF (Financial Action Task Force), and then there is the crypto guidance in the domestic space of the US.

The IRS is handling the US domestic aspect, and it sounds onerous.

I talked about how the Italian mafia uses the retired lira for their transactions in an article a while back. What makes that effective is that the government doesn’t actually recognize the lira anymore as a valid currency of Italy since they switched to the euro.

The Italian government is in a bit of a pickle because they are essentially just trading unofficial money… which would be the same as if the mafia declared Monopoly money their official currency of choice.

In the case of crytpocurrencies, people clamored for it to be recognized and legitimized. Wish granted! Now, it’s being taxed and regulated.

Some of the best attributes of crypto was that it was decentralized, unregulated, finite, and private. In short, it was apolitical. While some people may not make that connection, that is what they are enjoying about the currency: that it doesn’t get manipulated with the political tides.

In the past 5 years, as crypto gained traction so too, have the government efforts to track, regulate, and tax it.

One of the more notable additions to the form 1040-Schedule 1 is this question:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

If you worked through an exchange, then the exchange is reporting their transactions as well, so it is possible to validate the claims. Peer to peer and self-mining however are more difficult to trace.

In my last blog, I spoke of the “soft letters” that were sent to expats seeking better compliance. Same thing is happening here:

Letter 6173: This is a warning letter to anyone who fails to respond to the request for reporting of crytpocurrency.

Letters 6174 and 6174-A: These letters offer guidance on how to properly report your crypto holdings.

CP2000 Letters: To my earlier point regarding the reporting from exchanges, if there is a discrepancy, between what you report and what they report, you get this little gem.

The addition of the afore-mentioned question is part of a larger guidance issued by the IRS with regard to how to go about taxing virtual currencies. The stated purpose of this guidance is to elicit greater voluntary compliance as well as:

… more clarity on hard forks, cost basis calculations, transfers, gifts & donations. This was the first guidance released by the IRS in over 5 years, so this was probably the most important moment in 2019.

Two things will become increasingly necessary as the matter of crytpocurrencies move further in this direction:

  • A tax planning professional who understands all this guidance and can help you navigate these waters to save you money.

  • Cryptocurrency tax software that can accurately report gains and losses. Without this software, it’s nearly impossible to properly report.

I’ve not seen any indication that the IRS is expanding its resources to accommodate all this new guidance, so I question their bandwidth to accomplish much more than looking at discrepancy reports from time to time.

It’s out there, though. And more laws are coming. In 2019, three bills were introduced, not all terrible, but not great in the sense that congress is meddling more and more:

HR2144: It would exclude crytpo from being considered a security, by amending the Securities Acts of 1933 and 1934. It keeps smaller transactions in virtual currencies exempt from capital gains taxes.

HR528: This bill exempts from certain financial reporting and licensing requirements blockchain developers and providers of blockchain services that do not take control of consumer funds.
HR3650: This bill establishes a safe harbor period that prohibits certain penalties and additional taxes from applying to a taxpayer who receives a forked convertible virtual currency until the Internal Revenue Service issues regulations or guidance, or legislation is enacted, that addresses specified issues related to the tax treatment of forked convertible virtual currency.
A “forked convertible virtual currency” is any convertible virtual currency to which the taxpayer becomes entitled by reason of a hard fork. A “hard fork” is any material change in the shared digital ledger which is used to verify by consensus transactions in the currency if the change results in the maintenance of independent shared digital ledgers with respect to the currency.
The legislation, regulations, or guidance must prescribe:
  • the tax treatment of receiving forked convertible virtual currency,
  • rules for calculating and allocating the basis of forked convertible virtual currency,
  • rules for calculating the fair market value of forked convertible virtual currency at any given time, and
  • rules for determining the holding period of forked convertible virtual currency.

If you are filing in the US, this is absolutely something to be aware of. This sadly looks like another situation where innocent people are going to get tangled up in the vague unaccountable guidance of a government agency.  Yet another compelling case for second citizenship.

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