Efforts and Opportunities to Implement the New IRS Cryptocurrency to Become Compliant

Cryptocurrency is here to stay. As of November 17, 2019, the combined value of five cryptocurrencies by market cap was around $ 196 billion, and consumers can now use the cryptocurrency in place of legal tenders at many online retailers. and physical. In 2014, the IRS issued Notices 2014-21, which generally provided that cryptocurrency would be considered property for income tax purposes, hence the creation, sale, and acquisition of property in general. Was subject to the tax rules generally applicable to transactions.

Compliance gap

Despite the 2014 guidelines, the IRS found that many taxpayers engaged in taxable cryptocurrency transactions did not actually report those transactions. A report by the Inspector General of the Treasury for Tax Administration (TIGTA) concludes that cryptocurrency is more likely to be used to engage in illegal activities, including tax evasion. For example, each year from 2013 to 2015, less than 900 individual taxpayers traded bitcoin-related capital gains, a seemingly low statistic given its popularity and value at the moment.

The IRS has since acted on two fronts to combat the low yield of cryptocurrency-related income. First, the IRS has put enforcement measures in place to expose taxpayers. Second, it has issued additional guidance to clarify and further highlight the proper reporting of cryptocurrency and make it known that cryptocurrency transactions must be reported where income is generated.

Enforcement.

As written in the previous episode of this column (Michael Sardar, “Digital Currency: Market Value of Bitcoin, Ethereum and Lithium”, September 2017, in 2016, IR S published a John Doe summons to Coinbase, a major cryptocurrency exchange, to get information about his customers. While Queen Base initially contested the summons and refused to provide its customer information, the IRS eventually prevailed and Coinbase had to provide its customers with at least 20,000 cryptocurrencies. In March 2018, Coin Base provided the IRS with account data of approximately 13,000 account holders.

More recently, and likely based on information provided to the IRS in response to the coin invocations, the IRS sent out a target letter asking cryptocurrencies to take action to comply with taxpayer compliance. There was one report of non-compliance. As part of this initiative, the IRS sent out three different letters, with subtle but significant differences.

Letter 6174.

Seemingly the sweetest, the letter is aimed at a taxpayer who "is unfamiliar with the reporting requirements for cryptocurrency transactions." The letter further clarifies that taxpayers have received the letter "they do not need to respond to this letter".

Letter 6174-A.

The letter is very similar to the letter 6174, but uses more severe language, referring to a taxpayer who "did not correctly report [these] cryptocurrency transactions". The letter says taxpayers are not required to respond to this letter, but warns, "However, we may send other correspondence regarding possible future enforcement activities."

Letter 6173.

The letter refers to taxpayers who "have failed to meet their tax filing and reporting requirements for cryptocurrency transactions." The letter is intended for taxpayers who have serious concerns about the IRS and orders retaliation by the date stated in the letter. Letter 6173 requires the taxpayer to produce an authentic or amended declaration file to declare the cryptocurrency transaction or to provide a signed declaration under the fines stating that the taxpayer already has Why is it compliant with the cryptocurrency declaration? The letter said taxpayers who do not respond can be sent for review.

All letters direct taxpayers to additional resources and information on tax reporting requirements, including Notice 2014-21. In addition to urging taxpayers who receive letters to comply voluntarily, they are making these taxpayers aware of their cryptocurrency tax obligations. Taxpayers who receive these letters and ignore them will not be able to claim that they are ignoring their responsibilities in response to future IRS enforcement efforts, including civil audits, the imposition of fines, etc. until criminal proceedings can be instituted.

Additional instructions

The IRS also recently issued additional guidance on cryptocurrency. The guide answers a number of questions that were left unanswered after the publication of Notice 2014-21 and also touches on some new cryptocurrency developments that raised new tax questions. The purpose of this supplemental guide is to answer specific questions that are clearly addressed. However, it also serves the broader purpose of increasing volunteer compliance. Additional guidance inevitably translates into increased compliance as it complies with taxpayers who want to comply, but don't know the rules so they can properly report and pay taxes on their transactions.

To this end, on October 9, 2019, the IRS, in accordance with previous guidelines, issued the Revenue Roll 2019-24. This tax ordinance excludes the tax consequences of "rigid forks" and "air drops". A hard fork occurs when a cryptocurrency, usually recorded in a distributed ledger, experiences a turning point, under which the original (or "legacy") cryptocurrency and all the transactions it contains are recorded on the actual ledger, while the new cryptocurrency is created and recorded on a new ledger. In times of hardship, owners of inherited currencies may or may not receive new currency units. He's an aviator.

Revenue Rolling 2019-24 indicates that taxpayers who experience a hard fork without an airplane (i.e., they do not receive a unit of new currency) have not experienced a taxable event during a hard fork. ۔ On the other hand, if a taxpayer receives a new money plane after a hard fork, the taxpayer has experienced a taxable event and is required to report the value of the new currency received as income.

Revenue Rolling 2019-24 offers the following examples.

MK has 50 coins of a cryptocurrency. The N M cryptocurrency undergoes a hard fork, resulting in the formation of the N.A. cryptocurrency.However, no unit receives the N currency and has only 50 units of currency. A has no taxable income because of the rigid forks.

B owns 50 units of cryptocurrency R. Cryptocurrency R is experiencing a tough fork, leading to the formation of cryptocurrency S. At this date, 25 units of currency S are prepaid by air for those with access to the new currency. After hard forks and airplanes, B now has 50 RK currency units and 25 SK currency units. Since B has acquired a new asset in the form of currency S, B must recognize taxable income equal to the fair market value of currency S..

Additionally, on October 9, 2019, the IRS published 43 frequently asked questions addressing additional areas of cryptocurrency uncertainty. The following are examples of general guidelines for questionnaires:

Independent entrepreneurs who earn income in the form of cryptocurrency are subject to self-employment tax on that income.
Salaries paid in the form of cryptocurrency are subject to the same withholding rules as those paid in cash.
Taxpayers who exchange cryptocurrency for other assets or properties, or for a different cryptocurrency, should identify the loss or damage resulting from such exchange.
A taxpayer also transfers cryptocurrency from one wallet or account owned by the taxpayer to another wallet or account when it is owned by the taxpayer. This is even if the exchange that provides the facility gives feedback to taxpayers.
Taxpayers who own multiple units of the same currency at different prices can choose which units are sold if the taxpayer can specifically identify the units involved in the transaction.
If a taxpayer cannot identify which specific units are being sold, it is assumed that they will be sold on a first come, first served basis.

Push strong compliance

The IRS's implementation efforts and the release of its guidelines make it clear that it takes this issue seriously and will more aggressively prosecute taxpayers who do not comply with cryptocurrency revenues. As cryptocurrency is increasingly advertised in the tax code and the IRS continues to answer questions about cryptocurrency, taxpayers who continue to do harm will be strongly urged to argue that such mistakes were innocent mistakes and will face the growing possibility of a citizen. Fines and penal consequences. Taxpayers who do not correctly report cryptocurrency income should ask professional advice as soon as possible on their tax obligations and compliance options.

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