The Information Reporting Program Advisory Committee is a body which was established before the Internet was a major consumer network and is a result of federal government reorganization and, importantly, efforts to modernize and improve the IRS brought about by the Omnibus Budget Reconciliation Act of 1989. The committee periodically suggests actions the IRS needs to take in order to improve its operations, specifically relating to how the IRS gathers information about taxpayers.
This year’s public report is of interest to cryptocurrency advocates and participants because it specifically directs the IRS that it needs to be clearer on how it deals with Bitcoin and other cryptocurrencies.
In the past few years, with the innovative rise of technology throughout the financial sector, there has also been a rise in the popularity of investment in cryptocurrency. However, with the popularity of cryptocurency, there has also been an equal rise in questions as to the applicable tax consequences that apply to it. While we acknowledge and thank the IRS for publishing Notice 2014-21, which provides that virtual currency is treated as property for U. S. federal tax purposes, many industry and tax practitioners still question other tax consequences of cryptocurrency transactions. […]
Therefore, IRPAC recommends that the IRS issue further guidance on the tax consequences of cryptocurrency transactions.
The tax situation regarding cryptocurrencies has long been a subject of interest and debate in the crypto community. Unclear guidelines and the occasional prosecution of unregulated exchanges have made it difficult for users to know quite how to act, and as a result few are willing to admit they have cryptos.
One problem is that cryptocurrencies and their related service providers are overseen by multiple agencies. Everyone from FinCEN, the IRS, the Treasury, other federal regulatory bodies, and state agencies have a say in how people legally use the currency.
Coinbase Case Used As Example
In the more detailed recommendation regarding clarification of crypto regulations at the IRS, the Committee used United States v. Coinbase Inc, a case which decided that Coinbase has no legal remedy in providing information to the IRS about transactions over $20,000.
The Committee writes:
A good illustration of the difficulties of tax enforcement in this area may be found in a recent case. […] During 2013 through 2015, Coinbase maintained over 4.9 million wallets in 190 countries with 3.2 million customers served and $2.5 billion exchanged. The Coinbase summons initially sought “information regarding United States persons who, at any time during the period January 1, 2013 through December 31, 2015, conducted transactions in a convertible currency as define in IRS Notice 2014-21.” That request was later narrowed to Coinbase users who “bought, sold, sent or received at least $20,000” worth of cryptocurrency in a year.
The Committee believes that Americans would by and large be more open to reporting their crypto holdings and proceeds if they had more clarity in the consequences of so doing.They believe that as a result of the Coinbase summons and the lack of clarity, people will be more likely to use offshore exchanges in order to protect their assets.
Many, if not most, taxpayers will report these activities correctly if they are able to determine the implications of their cryptocurrency activities. Some taxpayers will be tempted to do otherwise, however because anonymity is inherent in the structure of the blockchain activities. In light of Coinbase,these taxpayers are likely to use exchanges outside the jurisdiction of the US.
It is important to note that the IRS is not required to follow the guidance of the IRPAC, but historically it has used the recommendations to modernize the way it handles its business. Those who wish to transact in cryptocurrencies legally can only hope that IRS heeds the advice of the IRPAC and implements clearer regulations in the coming months.