Cryptocurrencies & Tax Season

Although the cryptocurrency market may be ripe for financial investment, individuals and institutions alike have been waiting for guidance from the Internal Revenue Service (IRS) as to how this market will be regulated. Fortunately, the IRS recently shed some light on this matter.

On November 13, Charles Retigg, Commissioner of the IRS,  spoke at the American Institute of Certified Public Accountants’ (AICPA) National Tax Conference, and stated that “Cryptocurrency is no longer cash.” Retigg considers cryptocurrency to be “information data currency that the IRS has and will have more information about than you could ever imagine.” What that means for individual taxpayers and institutional investors remains to be seen. Because cryptocurrency is decentralized, as opposed to a centralized digital currency or part of a centralized financial system, it will be interesting to see what information flows from the IRS.

Retigg and the IRS face numerous challenges. For instance, as of July 5 of this year, the Treasury Inspector General for Tax Administration released a report finding that the IRS is “still not prepared to enforce compliance with the Foreign Act Tax Compliance Act.” Under the Foreign Act Tax Compliance Act (FATCA), individual taxpayers with specified foreign financial assets that meet a certain dollar threshold should report this information to the IRS as of 2011. Although it appears that, under most circumstances, a cryptocurrency holder will have to report their holdings under FATCA, IRS statistics reflect that just over 800 tax payers declared cryptocurrency-related gains or losses in the years 2013 to 2015. According to Bitcoin Market Journal, there are up to 5.8 million active bitcoin users, and an estimated five percent of Americans hold bitcoin. The IRS reporting numbers are significantly low in comparison these statistics.

Cryptocurrency holders need to be mindful of the tax implications. Earlier this year the IRS issued guidelines that address transactions in virtual currency. Given Retigg’s recent statements, there could be changes to these guidelines and other IRS regulations in the near future. IRS penalties for not properly reporting income tax range from being audited to a hefty fine or time in prison. Given the possible negative consequences, everyone involved in this sector needs to keep abreast of these developments.

If you have questions about taxes as they relate to cryptocurrencies, please do not hesitate to contact our Blockchain, Digital Currencies & Smart Contracts team.

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