The IRS is usually extremely thorough with giving concrete advice on just about every subject under the sun. In fact, its guidance is typically so complete that you have to read it many, many times to parse every word of very complex subjects. That’s why crypto aficionados have been a little perplexed at the fact that the IRS has not been terribly forthcoming in offering additional guidance around cryptocurrencies despite the fact that they have become such a dominant and growing part of the market.
As we gear up for Tax Day 2019, here’s what we know…and what we wish we knew.
Guidance the IRS Has Given on Crypto So Far
It’s relatively paltry…the main guidance is “You must pay taxes on cryptocurrency.” And that dates back to 2014. Of course, we urge everyone to do exactly that—as always with taxes, shirking your duty is a recipe for trouble.
The key point that the IRS has conveyed is that for tax purposes, crypto is treated as “property,” rather than “currency”—despite its name, of course. As property, it is subject to capital gains tax like other forms of property—such as stocks and bonds—as opposed to being taxed relative to foreign exchange currency principles.
Furthermore, we know that the IRS takes scofflaws seriously. In fact, it went so far as to issue a statement in March 2018 reminding taxpayers to report those virtual currency transactions. And, the IRS brought a successful suit against Coinbase in Feb. 2018, requiring it to turn over identifying records for all customers who had bought, sold, sent or received more than $20,000 through their accounts in a single year between 2013 and 2015.
Taken together, those two directives show that the IRS is serious about collecting taxes on cryptocurrency, which means you should take the Crypto Taxes and Accounting issue seriously as well. But, aside from that…where do we stand?
Lawmakers Urge More Crypto Tax Guidance
These somewhat shaky directives aren’t enough. This fall, five members of Congress reiterated a request they had made to the IRS in May 2017 addressing the lack of a comprehensive virtual currency strategy.
As the 2018 letter said, “More than a year after our initial letter, the IRS continues to expand its enforcement activities without issuing any further guidance for taxpayers. We therefore write again today to strongly urge the IRS to issue updated guidance, providing additional clarity for taxpayers seeking to better understand and comply with their tax obligations when using virtual currencies.”
Their main concern is that the IRS doesn’t hesitate to try to enforce the need to make tax payments, as detailed above, and yet has stayed largely silent on most issues surrounding cryptocurrency and taxes.
As the letter concluded, “We therefore strongly urge the IRS to expeditiously issue more robust guidance clarifying taxpayers' obligations when using virtual currencies. We also ask that you provide a written response outlining where the IRS is in its efforts to issue updated virtual currency guidance, what the IRS intends to cover in this guidance, and a timeline for its release.” All great questions...and yet…so far, there has been no further word from the IRS.
Taking a Cue from Crypto Tax Laws Overseas?
Of course, cryptocurrency is global in nature, so the IRS is not the only tax department grappling with its tax implications.
In December 2018, the United Kingdom took one of the boldest steps and released a policy paper that detailed cryptocurrency tax guidelines for individuals, covering everything from airdrops to blockchain forks to how crypto would be treated under the inheritance tax.
In general, any assets gained through activities like mining fees or awards, financial trading in cryptocurrency and payments for employment or services rendered count toward an individual’s total earned income, thus potentially moving them to a higher tax bracket. In the UK, the tax brackets go from 20 to 45 percent. “Disposal” activities, such as selling crypto for money or using crypto to pay for goods or services, will put crypto in the category of investments.
As one article concluded, “By treating crypto-assets as regular income and/or investments, dealing with them should be made easier, as most taxpayers (and all tax professionals) will already be familiar with these processes.
”Such a detailed policy statement is rare—if not singular. Globally cryptocurrency is viewed in a variety of ways, from China, where trading cryptocurrency is technically illegal and local bitcoin exchanges have been closed, to India, which doesn’t regulate exchanges but has sent tax notices about to a wide swath of citizens, following a national survey which showed more than $3.5 billion worth of transactions had been conducted over a 17-month period.
The Bottom Line — Pay Your Crypto Taxes in the United States
While we wait and see what’s next, there’s one action that we know for sure that all crypto investors should take. Pay the taxes you owe now. More guidance might come, but until it does, the only rule we know is that taxes on crypto must be paid.In the absence of robust IRS guidance, we are still here to guide you with any crypto tax questions. Find out more here.