Interesting IRS Q2 Clarification on Tax Policy For Cryptocurrency By Wendy Walker

By Wendy Walker, solution principal, Tax Information Reporting, Sovos

Right now, cryptocurrency tax policy is a bit of a mess. It won’t be for much longer. Everybody except crypto investors themselves is anxious to figure out exactly what the crypto tax policy is going to involve, but the only thing anybody knows for sure is that clarity on crypto taxes is coming.

Where the crypto stakeholders stand

There are a few key stakeholders in the crypto tax scenario. Here is where they stand:

The IRS

 The agency last provided guidance on crypto tax regulations five long years ago, with the now nearly infamous Notice 2014-21. In November, the new head of the IRS, Charles Rettig, promised that the IRS would provide significant clarification on cryptocurrency policy, but he didn’t offer a timeframe for clarification, and the agency has yet to issue any updates.

Congress: Some members of Congress, anyway, are growing impatient with the IRS. In September 2018, Ways and Means Committee Chairman Kevin Brady and four other members of Congress addressed a letter to then-IRS Acting Commissioner David Kautter asking for clarification on crypto tax policy. In April 2019, 21 members of Congress addressed a more aggressive letter to Rettig demanding guidance. As of mid-May this year, the IRS had not responded.

Crypto exchange platforms: In 2016, the IRS served a summons to popular exchange platform Coinbase seeking investor names and tax information. A legal battle ensued, which the IRS won in 2017. Then, the Tax Cuts and Jobs act of 2018 effectively enforced taxation on crypto assets, removing a legal loophole related to like-kind exchanges. Many crypto exchange platforms have begun to comply with tax regulations to the extent that they can. Some even tout that consistent tax policy will help bring credibility to cryptocurrency as a viable asset, which occasionally still suffers from the reputation of serving as currency for shady purchases on the dark web.

Crypto investors: Not surprisingly, this group is the only one that doesn’t appear interested in receiving clarification on crypto taxation. Some crypto investors got into digital coins because the currencies are unregulated. A recent online poll conducted on Twitter by notable crypto figure Crypto Wendy O, while non-scientific, nevertheless might shed some light on how crypto investors feel about taxes: 80 percent of more than 600 respondents said there was “not a chance” they would pay taxes on crypto earnings.

Confusion keeps the tax gap open

Unwillingness to pay is a problem for the government in general and the IRS in particular, as Fundstrat Global Advisors estimated that last year, U.S. cryptocurrency-related tax liabilities totalled $25 billion, based on gains of $92 billion, according to ETHNews. The crypto tax gap is large and only likely to grow until the IRS clarifies tax policy and begins enforcement for non-compliance in earnest.

That won’t be easy. The lack of guidance from the IRS has created an environment in which platforms are interpreting the rules in their own way. The form they employ for reporting transactions could be Form 1099-B, used to report proceeds related to broker and barter exchanges, or Form 1099-K, used by online payment processors such as rideshare or home-share companies to report goods and services transactions. The difference isn’t trivial.

The #IRS has made it clear it will crack down on 1099 backup #tax #withholding. Are you confident in your reporting and withholding process? Check out our summary of the IRS crackdown and our best practices to handle the process: https://t.co/UivesStMdn https://t.co/STiMI0CrYe

— Sovos (@SovosCompliance) May 14, 2019

Form 1099-B works in conjunction with Form 8949 to calculate short-term or long-term gains or losses. Form 1099-K income is generally offset by itemizing deductions under the various schedules now accompanying Form 1040. Depending on the Form 1099 received, the investor’s income tax obligations could be different.

Plus, Form 1099-K has problems of its own. The federal reporting threshold for third-party settlement organizations reporting Form 1099-K income to the IRS is $20,000 and 200 transactions in a tax year. Any crypto investor with less than either amount is not required to receive a 1099-K. For crypto platforms suddenly burdened with tax reporting duties, that might present a bit of relief. But for the government, the $20K and 200 transaction threshold leaves a lot of income unreported.

The next change in crypto tax regulation won’t be the last

Underreporting of income isn’t likely to continue, at least legally, for long. With Congress putting pressure on the IRS to clarify policy, the agency will provide guidance soon. For investors, that means being prepared to pay taxes on crypto investments, somehow, or face the consequences for tax evasion that any other investor would face.

For platforms, it means preparing to report to the IRS and to investors in compliance with policy and as efficiently as possible. Broadly speaking, that means implementing a process, technology solution, or both, with the capability of reacting quickly to regulatory changes and scaling to handle large volumes of crypto transactions. With so much uncertainty in tax law and this new asset class, the next clarification from the IRS on crypto taxes will likely not be the last. All anybody can say for now is that it’s coming, and all parties involved need to be prepared.

Wendy Walker is solution principal for Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase.

You can read more articles about cryptocurrency here.

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