The Ultimate Guide For Cryptocurrency Tax-Related Matters (#GotBitcoin?)
Tax specialists warn those who aren’t in compliance with rules to act quickly to avoid more woes. The Ultimate Guide For Cryptocurrency Tax-Related Matters (#GotBitcoin?)
The Internal Revenue Service is on the war path against Americans who haven’t reported income from cryptocurrencies like bitcoin.
In late July, the IRS said it had started to send warning letters to more than 10,000 people who may not have complied with tax rules on virtual currencies. Agency officials have said criminal tax indictments involving cryptocurrencies are expected soon, and other enforcement letters are going out.
Tax specialists are urging crypto users who aren’t in compliance to act quickly. While coming clean involves a maze of tricky decisions, ignoring the agency could cost a crypto holder dearly.
“I tell them, ‘It’s time to put your running shoes on.’ You must get to the IRS before they find you, especially if you got a letter,” says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink in New York.
Dealing with the IRS disclosure maze is Mr. Skarlatos’s specialty: He guided nearly 2,000 U.S. taxpayers through it when they confessed secret offshore accounts between 2009 and 2018. He performed triage for more, telling those with cases that wouldn’t land them in prison about simpler solutions.
The IRS’s crypto crackdown has similarities with its offshore-account campaign. Mr. Skarlatos has handled about a dozen high-dollar cryptocurrency cases.
Mr. Skarlatos says people in possible violation of IRS rules should first look for signs of tax fraud. It must involve intentional disobedience of the law. One clear sign is a large amount of unpaid tax, say above $15,000, he adds.
Other signs of fraud can be efforts to disguise cryptocurrency ownership, as by using an assumed name; using a “tumbler” service that mixes some cryptocurrency with others to obscure the original source; and lying to a prior tax preparer—because the IRS will ask.
If there was fraud, the crypto owner will need a lawyer to provide attorney-client privilege. The owner should probably apply to the IRS’s Voluntary Disclosure program, which often levies large civil penalties but protects against criminal prosecution.
If the wrongdoing wasn’t fraudulent, the crypto owner can often file what is called a qualified amended return, typically through an accountant. This will avoid some penalties but not interest.
There is an important exception for crypto owners who weren’t fraudulent but are already known to the IRS. This category includes people who were outed when a federal court required Coinbase, the leading cryptocurrency exchange, to turn over information on about 14,000 customers to the agency.
When the IRS contacts wrongdoers about an audit before they come forward, Mr. Skarlatos says, they often face larger penalties than wrongdoers who weren’t known to the IRS.
The IRS is focusing on cryptocurrencies because their use is expanding, and enthusiasts often praise the anonymity virtual currencies offer. Many trades aren’t reportable to the IRS by third parties—unlike sales of securities such as stock shares, which generally must be reported to the IRS by brokerage firms.
An IRS analysis found that for 2013, 2014, and 2015, when more than 80% of returns were electronically filed, fewer than 1,000 e-filed returns each year reported transactions appearing to use virtual currencies. Coinbase said at the end of 2013 that it had 650,000 accounts. Now it has more than 30 million.
Cryptocurrency advocates are upset by the IRS’s campaign. They say the agency hasn’t yet released long-promised guidance, including how to pinpoint some fair market values; which cost-allocation methods to use; or whether the agency favors a small exemption for personal use. Recently, 60% of global bitcoin transactions were below $600, according to Coin Metrics, a cryptocurrency data provider.
“The scary IRS letters tell people to ‘accurately’ or ‘properly’ report their transactions, but what’s that? Maybe they would have filed if they had clear answers and hadn’t felt overwhelmed,” says James Foust, senior research fellow with Coin Center, an advocacy group.
Advocates also point out that tax reporting is onerous because the IRS classifies cryptocurrencies as property akin to stocks or a home. If someone uses bitcoin to buy a car or lunch, that is typically a taxable sale—as it would be if the person paid in shares of stock.
If the selling price of the bitcoin is higher than its purchase price, then the profit is typically taxable at capital-gains rates. If the selling price is lower, there may be a deductible capital loss. Frequent traders can have thousands of transactions to detail on IRS Form 8949, and cryptocurrencies’ volatility can yield both gains and losses within a short period.
The IRS will dismiss these arguments, says Jordan Bass, a certified public accountant in Los Angeles who says three-quarters of his tax-prep practice involves cryptocurrencies, a specialty he turned to after advising friends with bitcoin.
“The tax framework has been clear since 2014,” he says. “The IRS isn’t going to impose terrible penalties on good-faith efforts, but it will try to make an example of bad actors.”
IRS Sends New Round of Letters To Bitcoin And Crypto Holders
Last week, the United States Internal Revenue Service sent another round of letters to crypto traders called CP2000. These notices were sent to traders of some crypto exchanges due to inconsistencies found in their tax reports.
Using the information provided by third-party systems — such as crypto exchanges and payment systems — the IRS has been able to determine the amounts traders owe and included the amounts in dollars in the notices. Individuals who have received these notices are required to pay within 30 days, starting on the delivery date indicated in the letter.
If you think the exchange — on which you traded — provided your details to the bureau, you are probably right, but do not hold it against the exchanges. The regulation stipulates that all broker and barter exchange services are required by law to annually report trader activity on a 1099-B form, send it directly to the IRS and send a copy to the recipient.
In addition, transaction payment cards and third-party network transactions are also required to report on Form 1099-K, send it directly to the IRS and send a copy to the payee.
The IRS has not yet published specific guidelines for crypto exchanges. In fiat stocks, every broker must submit 1099-B to the IRS and send a copy to the trader. In crypto, the IRS still didn’t publish clarification whether exchanges should provide 1099-K or 1099-B.
Exchanges can benefit from the uncertain situation to provide 1099-K — like Coinbase Pro and Gemini — but some do not provide any forms, such as Kraken and Bittrex. Meanwhile, the exchange must provide the users with the 1099-K copy by the end of every January, so they will be available to use it in their capital gains report. The users, at the same time, don’t submit the IRS their copy of 1099-K, as they only use this form to calculate and report on their capital gains or loss report.
Similarly, earlier this month, the United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs, has reportedly requested that digital currency exchanges provide it with information about traders’ names and transactions, aiming to identify cases of tax evasion.
In the U.S., data gathered from these exchanges is collected by the IRS and compared to every trader’s 1099-K report. If the reports do not match the data provided by the exchanges, the IRS will send the CP2000 notice to traders. The notice includes the amount every trader is expected to pay within 30 calendar days.
What’s more, the notice generally includes interest accrued, which is calculated from the due date of the return to 30 days from the date on the notice. This Interest continues to mount until the amount is paid in full, or the IRS agrees to an alternate amount. It means that interest began on the due date — on the day that you were supposed to report this for the first time. If you should, for example, have included this capital gains on your 2017 report, the interest will start on April 2018 — the last day you should have reported this gain. And it’s calculated until the reply date on the CP2000 notice.
Those Who Received The CP2000 Letter Have Two Options:
If The Amount Proposed Is Correct:
Complete the response form, sign it and mail it to the IRS along with the tax payment.
If the amount proposed is incorrect:
Complete the response form and return it to the IRS along with a signed statement outlining why you are in disagreement with the amount listed. It is important to include any supporting documentation to your claims.
It is highly recommended to provide a supporting calculation that is comprehensive and includes all wallet activities and transactions carried out on all exchanges in order to have a complete and accurate report as required by the IRS.
You do not need to file an amended return Form 1040X, but if you choose to do so, you should write “CP2000” on top of it.
It is important to understand that 1099-K reports for individuals trading crypto can be inaccurate in some cases, and does not include the cost basis, which is crucial for crypto trading calculations.
1099-K only asks for the gross amount of the activity. In crypto reports, you need to know how much it costs you (how much you paid when you bought it) and not only how much you got when you exchanged it.
You pay capital gains tax on the profit between the buy amount to the exchange (to fiat or another crypto) amount.
The price you pay for it is called “cost basis.” Without it you will not have an accurate report on crypto. 1099-K forms don’t ask this information, only 1099-b forms do.
Therefore, crypto activity must be fully calculated and compared to the previous tax filing before replying to the IRS notice.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Or Lokay Cohen is the vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation and managing a leading tax consultant firm. She holds an LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.
IRS Expands Penalties: Which Tax Mistakes Are Better Not To Commit
Willful and non-willful tax flubs are different. Taxes are complex, and innocent tax mistakes can often be forgiven — maybe with no penalty. Even if there is a penalty, non-willful is vastly lower than willful. In a criminal tax case, this fundamental dichotomy can mean the difference between innocence or guilt, freedom or incarceration. But penalties in civil cases can be plenty bad — and most tax cases are civil — and to the United States Internal Revenue Service, bad intent may not be bad at all.
With crypto, the IRS has said it is digging hard, investigating both tax evasion and just poor compliance. But any interaction with the IRS can routinely involve some kind of penalty. Sometimes, the IRS uses the threat of penalties to encourage payments. But in other cases, the IRS pursues penalties with a vengeance.
A good example is offshore accounts, which have strong parallels to crypto tax-compliance issues. Both willful and non-willful failures to report offshore accounts can be penalized. Civil penalties for non-willful violations can be $10,000 per account per year. But if the IRS says you were willful, you can pay up to $100,000 or 50% of the amount in the account. This is for civil cases, imposed in the context of regular IRS audits, even through the mail.
If the IRS says you were willful and wants big penalties, you can pay them or push back through the IRS Appeals Division. IRS Appeals is the classic place where the IRS and taxpayers settle disputes. But sometimes, either the IRS or the taxpayer won’t budge. Some courts say willfulness is a resolution to disobey the law, but one that can be inferred by conduct. Watch out for conduct meant to conceal.
However, much less can now be willful. The IRS penalizes for willful blindness and recklessness. The IRS often refers to Section 6672 of the tax code, which involves payroll taxes. Every employer must withhold taxes and promptly send the money to the IRS. If you don’t, Section 6672 permits the government to collect it from officers, directors and even just check-signers — any “responsible” person who willfully fails to pay employment taxes.
Willful mean in this context is very favorable to the government. Taxpayers are readily found to be willful if they merely ought to have known there was a risk withholding taxes were not being paid, and if they were in a position to find out. The IRS usually wins these payroll tax cases, so willful in this context means pretty little.
Aren’t foreign bank accounts different? The IRS appears not to think so. In the case Bedrosian v. U.S., Arthur Bedrosian opened two Swiss bank accounts in the 1970s but did not tell his accountant until the 1990s. The accountant advised him to do nothing. He said it would be cleared up at Bedrosian’s death, when the assets in the accounts were repatriated as part of his estate. But in 2007, a new accountant listed one account and not the other.
Eventually, Bedrosian amended his tax returns to correctly report both accounts. The IRS said the violation was willful and slapped on a penalty of $975,789 — 50% of the maximum value of the account. The District Court for the Eastern District of Pennsylvania found Bedrosian’s actions “were at most negligent,” and that the omission of the large account was “unintentional oversight or a negligent act.” So, the government appealed to the 3rd U.S. Circuit Court of Appeals.
The 3rd Circuit reversed the lower court’s decision due to the IRS’ arguments about the much harsher willful standards from Section 6672 payroll tax cases.
The 3rd Circuit cited two Section 6672 cases and quoted the standard for reckless disregard from one. The Bedrosian case was remanded to the District Court to apply the new standard. The fear is that willfulness is beginning to look quite broad — just as the IRS likes.
The IRS can almost always show willfulness any time payroll taxes were not paid. The flimsy “in a position to find out” standard in the context of Section 6672 noncompliance is very broad. In short, is the government seeking a sort of carte blanche when it comes to proving willful FBAR penalties (i.e., when one fails to report a foreign bank account)? The Justice Department’s reply in the Bedrosian case claims that the taxpayer, by signing and filing his or her return without reviewing it, “ought to have known” that there was a “grave risk” the form might not be accurate.
This argument suggests an attempt to use the signing of a return as inherent reckless disregard of the duty to report foreign accounts. The Justice Department has successfully argued in other cases that merely signing a return without the proper box checked is per-se willfulness — see United States v. Horowitz, et al., 123 AFTR 2d 2019-500 (DC MD); Kimble v. United States, 122 AFTR 2d 2018-7109 (Ct. Fed. Cl.). The courts in both cases said taxpayers have constructive knowledge of the content of their tax returns and cannot claim ignorance. In Horowitz, the taxpayers are arguing on appeal that the Section 6672 standard is inappropriate because FBAR willfulness occurs in a much different context.
It may be too soon to tell how all of this will shake out. Perhaps many taxpayers facing willful penalties may end up with understanding IRS agents who opt for non-willful penalties, at least if the taxpayer’s explanation and behavior seem reasonable. Taxpayers should be prepared to justify their mistake or misunderstanding in their particular circumstances if they hope to avoid the ever-expanding net of willfulness that seems to be brewing from the government.
There are growing concerns about whether IRS penalties are getting harsher and harsher. So far, the specific context for this drive seems to be in the offshore account arena. That is an easy one for the government.
These days, the IRS has mountains of information and documentation about offshore accounts nearly everywhere. That makes any infractions, however minor, perhaps even more risky than most other tax gaffes.
Still, if the IRS’ drive for penalties continues, one wonders if we might one day have strict liability for tax problems. In the meantime, when it comes to penalty notices and disputing penalty findings at any level, extra care is likely to be required.
The IRS Is Blindly Coming After Cryptocurrency Traders — Here’s Why
Over the past month, we have seen the IRS, the tax collecting agency of the United States, send out more than 10,000 warning and action letters to suspected cryptocurrency holders and traders who may have misreported digital assets on their tax returns. Letters like the 6174-A, 6173 and CP2000 have appeared in the mailboxes of cryptocurrency traders throughout the country, and the crypto tax software company that I run has seen an influx of frantic customers coming to us for tax help out of fear of penalties.
The problem here is that the IRS doesn’t have all of the necessary information. In fact, not only does it not have all the information, but the information that it does have on the cryptocurrency holders that it is sending letters to is extremely misleading. This information, which was supplied to the IRS by cryptocurrency exchanges like Coinbase, is causing the agency to blindly and oftentimes inaccurately come after cryptocurrency traders.
Related: Internal Revenue Service Sends New Round of Letters to Crypto Holders
Allow me to break this down further.
How Is Cryptocurrency Taxed In The U.S.?
In many countries around the world — the U.S. included — cryptocurrencies like Bitcoin are treated as property from a tax perspective, rather than as a currency. Just like other forms of property — stocks, bonds, real-estate — you incur capital gains and capital losses that need to be reported on your tax return whenever you sell, trade or otherwise dispose of your cryptocurrency.
Pretty straightforward: If you make a bunch of money investing in Bitcoin (BTC), you have a capital gain and a tax liability that needs to be reported. If you lose a bunch of money, you have a capital loss, which will actually save you money on your tax bill — though it still needs to be reported.
It doesn’t come as a huge surprise that many enthusiasts have not been paying taxes on their cryptocurrency activity. Because of this, it actually makes a lot of sense why the IRS has started carrying out these enforcement campaigns. However, the agency is using information that is extremely misleading, and it is leading to problems. This misleading information starts with Form 1099-K.
Breaking Down Form 1099-K
Cryptocurrency exchanges like Coinbase, Gemini and others issue 1099-K’s to users who meet certain thresholds of transaction volume on their platforms. The IRS states on its website that the 1099-K is an information return used to report third-party network transactions to improve voluntary tax compliance.
In plain English, the 1099-K is used to report your gross transactions on a third-party network — in this case, a cryptocurrency exchange. This means that all of your transactions, buys, sells, transfers, etc. are summed up and reported on a 1099-K. If you meet certain thresholds — gross payments that exceed $20,000 and more than 200 such transactions — you and the IRS are both sent a copy of this 1099-K from the cryptocurrency exchange. The IRS is using these documents to monitor who is and isn’t paying taxes correctly.
These “gross transaction” reports can quickly get extremely large for high volume cryptocurrency traders. Remember, every transaction you made is being summed together on this form. I purchased $1,000 worth of Bitcoin, and then traded that Bitcoin in and out for Ether (ETH) five times, and my gross proceeds are now over $6,000 — even though I only ever “put in” $1,000 cash! This is because all “buy” transactions are added together to report gross proceeds, and in this case, I technically had six different buy transactions and six different “sell” transactions — a Bitcoin trade into ETH is considered both a buy of ETH and a sell of BTC.
You can see how this number can become extremely large for a high volume trader. At CryptoTrader.Tax, we’ve seen 1099-K’s from customers in the millions of dollars range when the trader only ever had a few thousand dollars worth of crypto.
Why this is so problematic
1099-K’s are reporting gross transaction amounts and are being sent to the government. Yet, the numbers reported are completely irrelevant when it comes to tax reporting, as you are only actually taxed on your capital gains and losses.
Again as an example, say you purchased $10,000 worth of Bitcoin in April and then sold it two months later for $9,500. You have a $500 capital loss that would be deducted from your taxable income. However, reported on 1099-K, nothing is said of your net loss; the form only tells the government that you have $19,500 of gross cryptocurrency transactions.
Ultimately, 1099-K is not a form that should be used for tax reporting purposes, yet the IRS is relying on it for enforcement. Many people often mistake the 1099-K that they receive from cryptocurrency exchanges with the typical 1099-B that they might receive from their stock broker or other investment platform outside of crypto. The 1099-B is the correct form that reports all necessary information required to calculate and accurately report capital gains and losses — including cost basis and fair market value of your investments. It’s very easy to determine your total capital gain and loss with this form, contrary to 1099-K.
The fact that the IRS is relying on 1099-K to issue action letters is problematic.
Unfortunately, cryptocurrency exchanges do not have the ability to give you an accurate Form 1099-B.Why cryptocurrency exchanges can’t provide tax reports like a stock brokerage does because cryptocurrency users are constantly transferring crypto into and out of their exchanges, the exchange itself has no way of knowing how, when, where or at what cost (cost basis) you originally acquired your cryptocurrencies. It only sees that they appear in your wallet on their platform.
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting. In other words, cryptocurrency exchanges do not have the ability to provide you with the necessary information to calculate your capital gains and losses. This also means that they also don’t have the ability to provide you with a 1099-B.
Coinbase Itself Explains To Its Users In Its Faqs That Their Generated Tax Reports Won’t Be Accurate If Any Of The Following Scenarios Took Place:
You Bought Or Sold Digital Assets On Another Exchange.
You Sent Or Received Digital Assets From A Non-Coinbase Wallet.
You Sent Or Received Digital Assets From Another Exchange, Including Coinbase Pro.
You Stored Digital Assets On An External Storage Device.
You Participated In An Initial Coin Offering.
You Previously Used A Method Other Than ”First In, First Out“ To Determine Your Gains/Losses On Digital Asset Investments
These Scenarios Affect Millions Of Users.
Only Reporting Part Of Your Crypto Addresses? The IRS Needs To Know
Just a few months ago in July 2019, the United States Internal Revenue Service (IRS) sent approximately 10,000 letters to cryptocurrency holders regarding their crypto holdings.
The letters detailed that recipients may not have reported their transactions properly, or failed to report income and pay taxes on their digital currency transactions.
The IRS asked the recipients to check their reports and submit delinquent returns or file amended returns according to specific requirements. According to the letters, the reports must be “true, correct and complete” in order to be approved by the IRS. But how can the IRS know the submitted reports meet their criteria?
It is a well-known fact that the IRS used Chainalysis back in 2015 to possibly assist them in their Coinbase case, in which Coinbase was ordered by a United States federal magistrate to report 14,355 users to the IRS.
What many people don’t know, however, is that the IRS continuously contracts Chainalysis to support their intelligence work on cryptocurrency investors. The last contract was signed on July 2019, with a completion date of August 2020.
Additionally, the IRS has enlisted the help of Elliptic, another company involved in blockchain analysis that supports regulatory compliance under several contracts, the last of them signed on September 2018, with a completion date of September 2019.
Chainalysis Adds More ERC-20 Tokens to Crypto Sleuthing Service
Blockchain investigations firm Chainalysis has added support for five more ERC-20 tokens, expanding the reach of its anti-money laundering tracking service.
New coins include Basic Attention Token (BAT), OmiseGO (OMG), Dai (DAI), Maker (MKR) and 0x (ZRX). Together, they represented about 0.4% of the overall crypto market cap, and 0.002% of the market’s 24-hour volume at press time, data from CoinMarketCap showed.
The additions bring Chainalysis’ compliance, regulatory and tracking software – a favorite among federal investigators – to a larger swath of ERC-20 tokens. ERC-20 is crypto shorthand for “Ethereum Request for Comment” – a common set of rules governing tokens issued on the ethereum blockchain.
Chainalysis “is a de-facto federal standard,” said Casey Bohn, a crypto-crimes specialist with the federally funded National White Collar Crime Center. “That’s what they seem to be using most” to analyze and track crypto transactions.
Jonathan Levin, Chainalysis’ co-founder and chief strategy officer, said the additions help regulators trace illicit tokens – especially ERC-20 tokens on the ethereum network, which he said has become a popular hotbed for hackers to exploit.
In early 2019, hackers cleared out an estimated $16 million in ether and ERC-20 tokens from the now-defunct Cryptopia exchange.
ERC-20 tokens continue to gain popularity, putting pressure on exchanges to list them and increasing the chance bad actors try to steal them. This, Levin said, made the addition of ERC-20 tokens a priority.
“As of this month, there are more than 216,000 ERC-20 tokens found on the Ethereum network. With many end users flocking to get involved, cryptocurrency businesses want to quickly meet this demand.”
The eagle-eyed AML software is popular among crypto exchanges facing stringent global money-laundering safeguards. Last week, U.S. exchange Bittrex began using Chainalysis KYT software to monitor suspicious transactions, joining Binance.
Chainalysis will double its crypto coverage by the end of the year. It plans on adding XRP, ZCash and Doge, among others.
These Contracts Are A Signal That The IRS Has The Following Abilities:
Connecting one cryptocurrency address to another: The IRS can automatically find connected paths of crypto addresses and trace the flow of funding, source and destination of a specific transaction. This technology enables the IRS to find the link between crypto addresses that have been reported to them with others that may not have been reported.
Identifying exchange activity: While crypto trading on exchanges is off-chain and cannot be found on the blockchain, every trader must use a crypto address on the blockchain in order to deposit or withdraw their cryptocurrencies. The blockchain analysis systems have collected big data of exchanges addresses, which enable the IRS to link reported addresses to exchange activity.
Identifying estimated revenue and cash-outs and monitoring large volumes of activity.
Investigating criminal activity: Blockchain analysis companies provide support to the IRS in criminal and forensic cryptocurrency investigations.
Why Is It Difficult To Complete A Report As Per IRS Requirements?
Traders who have a lot of activity or trade on many exchanges and use many wallets sometimes have difficulties tracking all their past addresses.
Furthermore, crypto investors that use crypto as a means of payment make many transactions to third-parties, just like any other payment service. However, unlike credit cards, crypto payments do not specify who is the third-party, and those who did not keep records in real-time will struggle to reconstruct the data. With Bitcoin (BTC), this transaction will also contain a change address that needs to be associated with the payer to get an accurate and complete report.
What Can You Do To Make Sure Your Report Is Complete?
Collect all your data before you start your calculation. First of all, you need to understand that although tax filing is something that most people feel like they “just want to get it over and done with,” it is a process that should be done properly, so ensure you take the time to properly collect your data. Collect your addresses from all the wallets, all data from your crypto exchanges, and all of your activities during the required tax period.
Make sure nothing is missing. After you have successfully collected all your data, check for incomplete or incorrect information. There are some crypto tax platforms, such as Bittax or Blox, that track all your crypto addresses and combine them with exchange information. In the event that information is missing, the system will alert the user and will continue to send alerts until the user has completed or corrected all required information in order to provide a complete report.
Disclose your missing information. Over time, it is possible that one of your crypto exchanges shut down, an address was rendered inaccessible due to hacking, or you misplaced your seed password and are unable to restore the information. If you are unable to restore or gather the information required, disclose the reasons to the IRS with supporting documentation if you have any. It is important to consult with a professional before filling with the IRS. Make sure that your CPA or legal advisor understands crypto taxation.
The information that the IRS is receiving from cryptocurrency exchanges does not reflect your capital gains and losses whatsoever. This is problematic because these capital gains and losses are what you actually pay taxes on, not gross transaction amounts.
So, if you received a warning letter from the IRS, don’t panic. As long as you have been properly filing your cryptocurrency gains and losses on your taxes, you should be fine. The absurdly high numbers that you are seeing on these letters are often times irrelevant.
Nonetheless, it is a good idea to consult a tax professional who is familiar with cryptocurrency for further help and clarification — especially if it’s an action letter.
US IRS Releases Guidance On Crypto Airdrops And Hard Forks
The United States’ federal tax service has issued guidelines for tax reporting regarding cryptocurrency airdrops and hard forks.
In an announcement on Oct. 9, the U.S. Internal Revenue Service (IRS) announced the issuance of Revenue Ruling 2019-24, which addresses common questions of taxpayers and practitioners regarding crypto hard forks and airdrops.
The guidance also answers questions regarding cryptocurrency transmissions for investors that hold cryptocurrencies as a capital asset. IRS Commissioner Chuck Rettig said:
“The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”
Today’s new guidance adds to Notice 2014-21, which sets “general principles of tax law to determine that virtual currency is property for federal tax purposes.”
Or Lokay Cohen, the vice president of crypto tax calculation platform Bittax, told Cointelegraph that the guidance distinguishes hard forks from airdrops, and that not every hard fork should be treated as an airdrop. Those who receive new currency in a hard fork need to report the assets to the IRS as gross income.
Cohen further stated that the recent guidance follows a Congressional request to the IRS that sought clarity on tax reporting for cryptocurrencies.
IRS Sends Letters To Cryptocurrency Investors
Earlier this year, the IRS sent thousands of letters to cryptocurrency investors to clarify crypto tax filing requirements. 10,000 crypto investors received post from the agency, asking some to amend their tax filings, while compelling others to pay back taxes and/or interest and penalties.
Capitalizing on the uncertainty surrounding crypto tax reporting, scammers subsequently attempted to con investors out of their digital assets by sending letters claiming to be from the IRS. Some letters claimed that an arrest warrant had been issued against the recipient due to their unpaid tax obligations and that failure to make a payment immediately could result in an arrest or other criminal action.
The IRS Will Now Ask If You Own Crypto in the Most Widely Used US Tax Form
The Internal Revenue Service (IRS) has updated the main form individual U.S. taxpayers use to report their income to include a question about cryptocurrencies.
Following the release earlier this week of the IRS’s long-awaited guidance for reporting crypto-related income, the IRS on Friday circulated a draft of the new Form 1040, Schedule 1, Additional Income and Adjustments to Income. The draft was shared in an email to tax software companies, which the agency also shared with journalists.
The sheet, prefaced by a warning that it’s only a draft and not an actual document for filing taxes, asks at the top:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The main parts of the form, “Additional Income” and “Adjustments to Income,” both appear below this question.
“Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 should check the appropriate box to answer the virtual currency question.
Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose,” the IRS said.
The IRS asked its software partners to send comments on the new form in the next 30 days.
The guidance released this week was the agency’s second-ever given on virtual currencies, following five years of silence on the matter. The document provided answers to long-standing questions, addressing such issues as crypto received as a result of a hard fork, buying goods and services with virtual currencies, calculating the fair value of crypto holdings and other matters.
Crypto IRS Audits: Hire Professionals Or Do It Yourself?
Do it yourself or outsource it? Rightly or wrongly, most people seem to fear the IRS, and an IRS audit can be daunting, even if it is entirely by correspondence. Most considerations are arguably the same in many different kinds of tax audits. However, crypto tax matters can be even more sensitive than many others. One reason is return filings and records.
Let’s face it, many crypto investors have not been exactly scrupulous about filing taxes on time, reporting consistently, and keeping good records. After all, doing all of that isn’t easy, although it has gotten easier over the last year or two.
Another reason is the IRS focus on crypto. The IRS has said that virtual currency is an ongoing focus area for IRS criminal investigations, following its announcement on a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and audits. For some time now, the IRS has been hunting crypto user identities with software too. The IRS keeps stressing noncompliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
A Wake-up Call
Remember the IRS summons for John Doe to get Coinbase user accounts? More of those could be coming. More recently, the IRS sent thousands of letters to people with virtual currency transactions stating that they may have failed to report income or pay taxes properly. The IRS says it identified these targets through various IRS compliance efforts. IRS Commissioner Chuck Rettig seems to think this should be a wake-up call, and a warning.
The most frightening part of the IRS is the Criminal Investigation Division, although its involvement in an audit is rare. Even so, it is important to have a sound understanding of how criminal tax issues arise, so you can be prepared. Many people are surprised to learn that the vast majority of IRS criminal tax cases arise because of so-called “referrals” from the civil division of the IRS.
It happens from plain civil audits and civil IRS collection activity. One IRS Agent spots or hears something fishy and passes it on. It can start innocuously. During the course of an audit or a tax collection matter, a civil IRS auditor discovers something that seems odd and refers it to the Criminal Investigation Division. You may not even know that you are being investigated. Of course, many investigations do not lead to prosecutions. However, if you are contacted by the IRS Criminal Investigation Division, whether as a target or as a witness, you should politely decline to be interviewed. Refer them to your lawyer.
Many people think that cryptocurrency could be the next big thing for the IRS, which has been training its criminal agents for Bitcoin and other virtual currencies — and that should tell you something. If the IRS is suspicious, they can require you to produce records, even ones that may incriminate you. With offshore bank accounts, the IRS refined this technique by seeking a grand jury subpoena to produce your offshore bank records.
Many Americans have a knee-jerk reaction to this. “Just take the Fifth,” lawyers tend to say.
The Fifth Amendment says you cannot be forced to incriminate yourself. However, the IRS can make you produce these required records even if they will incriminate you. You may be able to refuse to speak under the Constitution, but sometimes, you cannot refuse to produce certain records.
Getting Professional Help vs. DIY
To return to more normal tax audits and notices, if the IRS audits you or has begun sending you notices and so on, should you handle it yourself or get professional help? The answer can vary, but getting help is often the wiser path. If the IRS visits you in person, hire a lawyer. No personal visit should be taken lightly. You have no legal obligation to talk to the IRS, whether it is the civil or the criminal part of the IRS contacting you. Politely tell them that your lawyer will contact them, and ask for their business card.
It is unlikely that the IRS will push you to talk after you say this. But even if they do, politely decline. Even if the IRS says you are just a witness and that it is someone else they are pursuing, you do not have to talk. Besides, who is a witness and who is a target of an investigation can be quite fluid — it can and does change. Written notices and other materials are obviously considerably less threatening. However, even if the query or audit is all in writing, most people feel a chill when dealing with the IRS.
You might receive a letter from the IRS asking about some aspect of your tax return. You might want to handle it yourself — but be cautious and reflective if you do, especially in more serious matters. The point at which you may need a representative is often early. In fact, some taxpayers spend large sums with tax professionals precisely because they initially tried to handle the case themselves. Sometimes, you can dig a hole that runs deeper than if you had handed the case to a professional from the start.
One reason to have a tax lawyer or accountant handle your audit is to get some distance. Even in a civil audit, talking to the IRS can be dangerous and can put you in a disadvantageous position. The IRS may ask you about things you don’t want to answer, but not answering is awkward if you are handling it yourself. Having a representative means you will have time outside the IRS presence to prepare appropriate responses that put the issues in the best possible light.
Some taxpayers even represent themselves beyond an audit at the IRS Appeals Division or in the United States Tax Court, although many of those cases seem to be poorly handled. Even the once-famous lawyer, F. Lee Bailey, represented himself in the U.S. Tax Court in a $4 million dispute with the IRS. Bailey won one issue but lost most of them, including claimed loss deductions for his yacht. Worse, the court approved significant negligence penalties against him that he probably could have avoided with tax counsel. Seeing to your own case clearly isn’t easy, but it usually pays to hire someone to handle it.
New IRS Guidance: How To Report Crypto Assets Accurately
The United States Internal Revenue Service (IRS) is continuing to focus its efforts in cryptocurrency. After sending a recent enforcement letter, the IRS has released two new pieces of guidance for taxpayers who engage in transactions involving digital currency.
The new guidance includes Revenue Ruling 2019–24 and FAQs, including guidance for using the specific identification method. Additionally, the IRS has published a new draft for form 1040 Schedule 1, including a broad declaration regarding crypto holdings or trade.
Here Is A Breakdown Of These Publications.
Revenue Ruling 2019–24: Airdrops And Hard Forks
So, what are airdrops and hard forks, and what do they mean for the tax obligations of crypto holders?
In short, an airdrop occurs when a company distributes its tokens to a user’s wallet, free of charge, in order to raise funds, and in certain other cases, such as after hard forks. A hard fork is when nodes of the newest version of a blockchain creates a permanent separation from the previous version, creating a “fork” in which one path follows the new and upgraded blockchain, while the other follows the old path.
In Bitcoin (BTC), a hard fork is the result of changes in the blockchain rules, sharing a transaction history with Bitcoin up to a certain time and date. The most famous hard fork occurred in August 2017, when some Bitcoin developers and users decided to initiate a hard fork known as Bitcoin Cash (BCH).
The new IRS guidelines distinguish between hard forks and airdrops, stating that not every hard fork should be treated as an airdrop. Those who received new currencies in a hard fork are considered as having received them through airdrop and should report it to the IRS as gross income.
The new ruling also acknowledges the possibility that a taxpayer did not receive an airdrop, detailing that if a taxpayer receives new currency from an airdrop into a wallet managed by an exchange that does not support the airdropped currency, the taxpayer is off the hook. But, if the exchange later ends up supporting that airdropped crypto, the taxpayer is considered to have received the new currency at that time and is therefore liable to taxation.
While the IRS has made significant steps in regulating crypto, the new guidance raises questions about the request to tax airdrops when the crypto holder receives them as gross income, unlike regular crypto which it’s taxable events occur only on selling or exchanging.
Frequently asked questions
Back in 2014, the IRS issued Notice 2014–21, which describes how existing general tax principles apply to transactions using digital currency. This notice contained 16 Q&As, which have now been amended and added to the 2019 ruling, resulting in a whopping 43 questions and answers that cover the entirety of crypto taxation issues.
These Are The Main Issues You Should Know:
1. Understand What Fair Market Value Is:
Fair Market Value (FMV) is typically defined as the selling price for an item to which a buyer and seller can agree.
Cryptocurrency value is determined by the cryptocurrency exchange and recorded in U.S. dollars. However, when it comes to peer-to-peer (P2P) transactions or other transactions not facilitated by an exchange, the FMV is determined according to the date and time at which the transaction was recorded on the blockchain.
2. Determine the cost basis:
Cost basis is the original value of an asset for tax purposes. For digital currencies, the cost basis is the amount you spent to acquire the digital currency, including fees, brokerage commissions from exchanges, and other acquisition costs in U.S. dollars.
Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits based on marital status, income, etc. To calculate an accurate cost basis, you must first determine which units of currency were sold, exchanged, or disposed of and match the buying cost for every unit sold.
3. Choose The Calculation Method Carefully:
Here is the big news: For the first time, the IRS has clarified the preferable method of calculation for cryptocurrency, advising to use the “specific identification” method. This means identifying the exact unspent output Bitcoin transaction (UTXO) you have sold out of all the Bitcoin you had in your wallets, and then calculating your tax liability based on the sale of the actual Bitcoin UTXO.
If you are not using it already, you should use the first in, first out (FIFO) method. This method does not take real-time user activity into consideration. Basically, to calculate in the FIFO method, you need to make a list of all purchases and another list of all sales. Then, to do the matching, take the first item in the purchase list and calculate the tax results as if you sold it at the same price and on the same date as the first sale in the sales list. FIFO results can cause overtaxation, especially if you bought your first Bitcoins in the early years.
To get a complete and accurate report, taxpayers are encouraged to use the specific identification method.
This method is used to track individual units of virtual currency. It is applicable only when individual units can be clearly identified to provide a complete report of crypto-asset movements, including addresses, wallets, exchanges, etc.
Taxpayers can identify specific units by unique digital identifiers such as private and public keys and addresses, or with records showing the transaction information for all units of a specific digital currency (such as Bitcoin) held in a particular account, wallet or address. Specific identification must exhibit the date and time each unit was acquired, the cost basis and FMV of each unit at the time of acquisition, as well as the date, time, FMV and sale value or price of each unit when it was sold, exchanged or disposed of.
4. Save All Your Documentation:
When compiling a report and filling out the appropriate documentation, taxpayers must report all income, gains and losses incurred by all taxable transactions, regardless of the amount. IRS codes and requirements are to maintain thorough documentation on receipts, sales and exchanges in order to establish validity on their tax returns.
New IRS Tax Guidance Targets Crypto, and US Persons Who Use It
On Oct. 9, 2019, the United States Internal Revenue Service issued Revenue Ruling 2019-24 and a series of frequently asked questions, identifying rules governing U.S. taxation of digital currencies. Taxation in the U.S. is unbelievably complex, but the new IRS guidance takes a step-by-step approach to address some of the most common issues facing holders of digital currency.
The basics are as follows: If you hold digital currency and you sell or exchange it, you are subject to U.S. tax. If you are granted digital currency in the form of salary or as a result of a hard fork, you have taxable income. If you receive digital currency as a result of a gift, there is no immediate tax.
U.S. taxation of digital currency is limited to U.S. persons. Who is a U.S. person? U.S. citizens, U.S. green card holders and individuals who spend more than 183 days in the country (measured using a formulaic three-year lookback). If that is you, a tax obligation may exist.
How do you measure your gain or loss from a sale or exchange of currency? It’s the difference between your digital currency cost basis and the fair market value of the property you received in exchange. How do you know what your cost basis is? The FAQs provide detailed guidance, but essentially, the IRS allows two methods for identifying your basis:
1) You Can Specifically Identify The Exact Currency Sold, Traced To The Ledger, And Use The Cost Of That Specific Currency To Determine Your Gain Or Loss.
2) Or You Can Use The “First In, First Out” Method, Meaning Your Basis Is Computed Based On The Cost Of The Oldest Currency Acquisition In Your Wallet, Moving Forward In Time As You Continue To Sell Currencies.
What about digital currency provided as compensation for services? That type of distribution is treated as ordinary income, not a capital gain, similar to cash paid in the form of salary and wages.
What about cryptocurrency forks? The Revenue Ruling holds that when a taxpayer does not receive units of a new cryptocurrency as a result of a hard fork, the taxpayer also does not have gross income. That is the good news.
However, when units of new cryptocurrency are distributed (either as a complete currency replacement or split with the new currency being issued but old currency still valid), the Revenue Ruling holds that the taxpayer has accession to wealth and therefore has ordinary income. The amount included in gross income is equal to the fair market value of the new cryptocurrency measured as of the date that the distribution (usually via airdrop) is recorded on the distributed ledger.
While the IRS materials provide much-needed guidance, there are some concerns about unexpected hard forks.
Many times you find out about a hard fork after the fact. Nevertheless, the IRS takes the position that taxpayers must track and account for hard fork transactions. Thus, it places the burden on individuals to watch their wallet and trace activity throughout the year.
Also, there is no “de minimis” exclusion. Meaning, every transaction involving digital currency must be reported. What about a purchase of a cup of coffee with crypto cash? This payment gives rise to a taxable exchange. The value of the coffee you just bought less the basis in your currency you provided must be computed and reported to the IRS as a gain or loss.
When did you have to start complying with these basis rules and coffee purchases? Forever. In July 2019, the IRS announced through a news release that it had begun sending “educational” letters to taxpayers with digital currency transactions that have either potentially failed to report income or did not accurately report their transactions. By the end of August, over 10,000 taxpayers had received these letters. There are three letter versions: Letter 6173, Letter 6174 and Letter 6174‑A.
Letter 6173 informs the taxpayer that the IRS has “information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency.” This letter requires the taxpayer to provide a direct response by taking one of three possible actions:
1) File delinquent returns, reporting any digital currency transactions.
2) Amend Returns To Properly Report Any Digital Currency Transactions.
3) Provide A Statement That Explains Why The Taxpayer Believes It Is In Full Compliance, Signed Under Penalties Of Perjury.
Letters 6174 and 6174-A inform the taxpayer that the IRS has “information that you have or had one or more accounts containing virtual currency.” Though neither of the two letters requires a direct response from the taxpayer, Letter 6174-A expressly warns the taxpayer that the IRS may pursue further enforcement activity in the future.
The three versions of the letters show that the IRS is mining the information it has in its possession and forming views about which digital currency holders it believes are noncompliant, and to what degree.
Although the IRS stated in its announcement that “all three versions of the letters strive to help
taxpayers understand their tax and filing obligations and how to correct past errors,” Letter 6173 seems to presume that the taxpayer in question already understands the digital currency reporting requirements and has chosen not to comply with them. Letter 6174-A is a step down from Letter 6173, but it still assumes a higher level of knowledge on the part of the taxpayer than Letter 6174 does.
John Doe Summons
The letters followed the IRS’s issuance of a “John Doe” summons to Coinbase, one of the largest platforms for exchanging Bitcoin and other forms of digital currency. Through the John Doe summons, the IRS sought information regarding all Coinbase customers who conducted transactions on the Coinbase platform between 2013 and 2015. Coinbase resisted the summons and sought to narrow its scope.
In late 2017, the U.S. District Court for the Northern District of California ordered Coinbase to produce the taxpayer identification number, name, birthdate, address, records of account activity, and all periodic statements of account or invoices. Ultimately, Coinbase produced documents for approximately 13,000 customers. While it is widely speculated that the IRS identified the initial group of more than 10,000 taxpayers to receive compliance letters using the data provided by the Coinbase subpoena, any taxpayer with dealings in digital currency should anticipate increased IRS scrutiny.
Revised Draft Form 1040
Following the issuance of the October Revenue Ruling and FAQs, the IRS also released a draft Form 1040, Schedule 1 — which, if adopted, will require taxpayers to answer whether at any time during the year the taxpayer sold, sent, exchanged or otherwise acquired any financial interest in digital currency. The change in Form 1040 would place taxpayers in the position of having to think about their digital currency holdings and inquire whether there have been taxable events that need to be reported and taxed.
Methods of coming into compliance
In light of increased enforcement and compliance efforts on the part of the IRS, it is especially important for taxpayers who have held digital currency in the years preceding 2019 to seek advice from a competent tax professional to determine if there have been any taxable transactions associated with the acquisition or disposition of digital currencies. If there was a reportable transaction left off an income tax return, the IRS could impose significant penalties and interest charges. The IRS is also reviewing income tax returns to determine if the noncompliance was due to willful conduct. Such review can result in criminal referrals and prosecutions for filing false tax returns.
There is good news in the face of the potential enforcement of noncompliance. Most taxpayers can take advantage of the IRS’s voluntary disclosure policy, which mitigates penalties. And for those taxpayers who received letters directly from the IRS, options for taking affirmative action are outlined in the letter.
The bottom line is this: If you have held digital currency at any time, you should contact a qualified tax professional to assist you in evaluating your tax situation.
IRS: Like-Kind Tax Exemption Has Never Applied To Crypto Transactions
The like-kind exchange tax exemption is not applicable to cryptocurrency transactions, according to the United States Internal Revenue Service (IRS).
An official at the IRS Office said that U.S. taxpayers have never been authorized to postpone paying tax as part of the like-kind exchange principle even before the 2017 tax overhaul, Bloomberg Tax reports Nov. 13.
Suzanne Sinno, an attorney in the IRS Office of the Associate Chief Counsel, delivered her remarks on U.S. crypto taxation at the American Institute of CPAs conference this Wednesday in Washington. According to the report, Sinno worked on recent IRS cryptocurrency guidance that was issued in October.
Like-Kind Exchange Exemption Can Defer Tax Payments On The Gain Of A Sale
Under U.S. tax law, a like-kind exchange, also known as a 1031 exchange, is an asset transaction that does not generate a tax liability from the sale of an asset when it was sold to acquire a replacement asset.
While it was clear that taxpayers could not claim crypto-to-crypto sales as like-kind after 2018, the rules governing transactions previous to the 2017 overhaul were unclear.
Based on the new announcement by Sinno, U.S. taxpayers have never been authorized to apply the like-kind exchange principle to crypto-to-crypto trades in order to postpone paying tax on the gain of a sale.
Promotional airdrops are still tax-free, for now
The news comes after the IRS issued guidelines for tax reporting regarding cryptocurrency airdrops and hard forks on Oct. 9. The new rules say that those who receive new currency in a hard fork need to report the assets to the IRS as gross income. While the IRS distinguishes hard forks from airdrops, the agency has reportedly not yet decided whether promotional airdrops should be treated as taxable.
IRS Vs. Bitcoin ATMs: Industry Says There Is Already Enough Regulation
Earlier this week, the number of Bitcoin (BTC) ATMs installed worldwide reached a new milestone, surpassing 6,000. Coincidentally, another major development just a day before occurred within the same area: The United States Internal Revenue Service said it was looking into potential tax issues caused by such ATMs and kiosks.
This development might allow the IRS to succeed in mitigating the use cryptocurrency for large-scale federal tax non-compliance, experts suggest. However, Bitcoin ATMs remain a low-transaction-size business which is already regulated enough to detect high-scale fraud.
Bitcoin ATMs, from a single kiosk to a multimillion dollar industry in six years
The world’s first-ever Bitcoin ATM opened in October 2013 at Waves Coffee House in Vancouver’s downtown area, while the first machine in the United States went online in February 2014 in Albuquerque, New Mexico (although, it was removed 30 days later).
Since then, Bitcoin ATMs have grown into a multi-million-dollar industry, as the companies who operate the machines collect sizeable fees (reportedly around 8.93%). For instance, Cottonwood, a firm that controlled 91 machines in New York as of December 2018, had a gross annual revenue ostensibly exceeding $35 million — about $385,000 in cash per machine — and just 13 employees, as per a Bloomberg investigation.
According to data from online resource CoinATMRadar, the U.S. currently has the most Bitcoin ATMs in the world. More specifically, there are 3924 machines installed across the country, accounting for over 65% of the world’s total Bitcoin ATMs. Moreover, the industry continues to develop at a rapid pace: Over 130 machines have been deployed this month alone, while the average daily number of Bitcoin ATMs installed is fluctuating at around seven.
Regulation: “Totally Legal” But Still A Gray Area
As it tends to happen within most booming industries, sooner or later, regulators start to apply more scrutiny. On Nov. 15, the IRS Criminal Investigation Chief, John Fort, said that his agency is collaborating with law enforcement to investigate illicit uses of cryptocurrency through kiosks, stating:
“If you can walk in, put cash in and get bitcoin out, obviously we’re interested potentially in the person using the kiosk and what the source of the funds is, but also in the operators of the kiosks.”
Fort explained that such services are required to conform to Know Your Customer and Anti-Money Laundering rules: “They’re required to abide by the same know-your-customer, anti-money laundering regulations, and we believe some have varying levels of adherence to those regulations.” The IRS executive added that although the regulators haven’t had any public cases filed, they “do have open cases in inventory” related to cryptocurrency tax issues.
So how exactly is the industry regulated in the U.S.? It seems to fall into a grey area of the law. Cal Evans, founder of compliance and strategy firm Gresham International, told Cointelegraph:
“Most Bitcoin ATM owners that are trying to follow the rules, as much as possible, are relying on Money Transmitter laws. We see this strategy deployed with the bigger firms such as Coinbase. These laws differ from state to state with the USA, with the most notable exception being the state of New York where parties are required to own one of the notorious ‘Bitcoin’ Licenses to conduct this business.”
Thus, there are two levels of regulation: federal and state. As CEO of CoinATMRadar Matthew Hayes told Cointelegraph, the former is “similar in all the states and quite straightforward,” and aims to prevent illicit activities such as money laundering and tax evasion. State-level regulation, however, differs:
“Some states have relaxed rules and allow quite easy access to start such a business. In other states, there might be high requirements to operate incl. large size surety bonds and costly licenses.”
Thus, unlike traditional ATM operators, Bitcoin ATM operators are typically treated as Money Services Businesses that have to operate under Money Transmitter Licenses, the requirements for which vary by state, as Zachary Kelman, managing partner at Kelman.law, summed up in a conversation with Cointelegraph. However, there are some exceptions among more crypto-friendly states that differ from New York and Florida regulations:
“On the other end of the spectrum are states that are far more Bitcoin ATM-friendly — for example, the Pennsylvania Department of Banking and Securities has determined that cryptocurrency transactions are exempt from money transmitter rules, and the Wyoming legislature enacted a law exempting cryptocurrency businesses from MSB licensing requirements.”
Andrew Barnard, co-founder of Bitcoin ATM firm Bitstop, added that many states, including California, have still not made up their minds in regard to Bitcoin ATMs or do not require a Money Transmitter License as long as the crypto sold through the ATMs is a two-party transaction. He elaborated to Cointelegraph:
“States like Texas and others do not require a money transmitter license if you are selling your own Bitcoin to the person in front of the machine as opposed to just sending the Bitcoin directly from an exchange to the customer which would make it a three party transaction.”
Some other hindrances come with the lack of more clear-cut regulations, albeit less major. For instance, companies have difficulties with obtaining local city permits for Bitcoin ATMs, which is why they are usually installed in private establishments, Evans observed.
Indeed, as the Bloomberg investigation argued, most crypto kiosks in the U.S. tend to be located in corner shops, cigar bars and casinos. Nevertheless, there are some noticeable exceptions: Earlier this month, Bitstop installed one of its machines at the Miami International Airport, one of the largest airline hubs in the country.
As for the regulations, it seems that industry players do have concrete guidance to follow despite the juridical uncertainty that experts highlight. “FinCEN has been clear since 2013 about the KYC/BSA/AML requirements for cryptocurrency exchangers,” said Max Lopez, marketing director at Coin Cloud — a company that operates as a licensed Money Service Business and hosts over 350 cryptocurrency kiosks across the U.S.
“We only know the regulations we are following and can not speak for others in the cryptocurrency kiosk industry,” Lopez added, drawing a line between large businesses and smaller players. “It’s important to separate individual companies and not place them all under one umbrella as you have regional, hobbyist and ‘mom and pop’ operators with one machine.”
Barnard of Bitstop confirms that larger companies follow the same rules within the Bitcoin ATM industry. “The top legitimate operators in the space are registered with FinCEN on a federal level and maintain a AML/BSA compliance program which should be tested and updated regularly (once a year),” he told Cointelegraph, adding:
“It’s Not That Difficult To Be Registered On A Federal Level.”
What Does The IRS Development Mean For The Industry?
The IRS should have a “probable cause” or “reasonable belief” to delve into the Bitcoin ATM industry, according to Evans. As of now, “simply using the Bitcoin ATMs itself is in no way a crime,” the expert stressed, especially if the vendor is following MTLs and users are declaring their transactions to the IRS:
“Let’s paint a scenario, if you are a Bitcoin ATM user in the US (which is totally legal), and you declare those transactions on your tax return (as now required), the IRS could be in breach of constitutional rights by investigating the individual. Essentially, the IRS should not be able to tax activity it then deems as ‘illegal’ activity after the fact. Otherwise, where do we draw the line? Do we begin taxing drug dealers?”
Nevertheless, the IRS has been historically slow to act, which also suggests that the industry is far from being radically changed by the tax regulator, Evans adds. Kelman, however, envisions certain changes that might come with the IRS statement. He told Cointelegraph that some of their Bitcoin ATM operator clients had already engaged with the IRS:
“The IRS has been amenable to these clients and their businesses, asking for and accepting without issue the Bitcoin ATM users’ Know Your Customer (KYC) information, which is collected to the extent possible by Bitcoin ATM operators per compliance with MSB rules.”
Kelman explained that while his firm does not expect Bitcoin kiosk owners to close down in light of this development, they do expect changes to which the kiosk operators must respond, such as collecting KYC data from any user whose transactions require Currency Transaction Reports or Suspicious Activity Reports filings:
“The Financial Crimes Enforcement Network (FinCEN) already requires MSBs to file Currency Transaction Reports (CTRs) on all transactions in excess of $10,000 and Suspicious Activity Reports (SARs) for any and all suspicious transactions — or sequences of transactions — over $2,000.”
Kelman believes that the statement from the IRS will prompt users to conduct smaller transactions beneath the KYC limit. In his opinion, the IRS “will be able to greatly mitigate efforts to use cryptocurrency for large-scale federal tax non-compliance,” while small-scale tax cheats will likely stay under the radar.
Indeed, larger operators seem unfazed by the news. Both Coin Cloud and Bitstop representatives told Cointelegraph that while smaller Bitcoin ATM owners might not be forced to either become fully compliant or shut down, it remains business as usual for them.
Even if smaller players choose to play by the rules, they might still have to shut shop over time due to the costs associated with maintaining a thorough compliance program, Bitstop’s Barnard added. He also told Cointelegraph:
“Mr Fort is reasonable when he says there is most likely a high variance of compliance and adherence to regulations from operator to operator. This is true because there are different Bitcoin ATM hardware models that have different software stacks and perform compliance differently. Not all operators are created equal. There’s a lot of good guys, but our industry does have its own share of bad apples.”
As Evans of Gresham International told Cointelegraph, physical ATM machines harness a large amount of data about their users, such as card used, PIN number attempts, speed of PIN entry, date, time, transaction sizes, and pictures of their face. “The main concern the IRS has with the Bitcoin ATMs, is that some of these machines do not collect ANY data,” he said:
“If we compare this, for example, to online exchanges (those which allow US citizens and residents to use them), they are required to keep accurate data on the users, which the IRS and other law enforcement bodies can then use to track the movement of funds.”
Enough Is Being Done Already
Nevertheless, Bitcoin ATMs controlled by large operators claim that they collect a considerable amount of data about their clients as per current regulations concerning Anti-Money Laundering and the Bank Secrecy Act. “As a registered MSB with FinCEN, Coin Cloud is required to keep customer KYC and transactional data for at least 5 years,” Lopez told Cointelegraph. “All cryptocurrency kiosk companies can be subpoenaed at any time for the records they keep.”
Barnard said that although KYC collection can vary depending on how much the customer wants to buy or sell. “For lower amounts under $150, a phone number, name and address may be reasonable,” the Bitstop representative told Cointelegraph, adding that they limit all of their customers to purchase no more than $3,000 per person per day.
“Even then, less than 5% of our customer base will use that limit,” he continued. “The average purchase from our Bitstop Bitcoin ATMs is $180 per person. Bitcoin ATMs are a high-volume, low transaction amount business.”
IRS Not Infringing Privacy Requesting Crypto Exchange Data: US Judge
A California federal court has affirmed the validity of the United States Internal Revenue Service’s (IRS) request for data from crypto exchange Bitstamp in connection with an individual tax reporting case.
Per a Nov. 25 filing, the court has found that five of the six arguments presented against the IRS “lack merit,” but has conceded on one point that the tax agency’s summons was indeed overbroad, as the Petitioner contended.
The filing relates to court proceedings initiated by William Zietzke, who has argued that the IRS is overstepping its remit in conducting an audit of his tax returns.
Petitioner Alleges Privacy Infringement, ‘Bad Faith’ And Irrelevance
As the filing outlines, Zietke had initially informed the IRS of his own mistake in a tax return that had allegedly overestimated his long-term capital gains in 2016.
In seeking a refund from the IRS to correct his error, the agency set out to investigate Zietke’s case, requiring him to provide extensive data on his history of Bitcoin holdings and transactions.
Zietke is alleged to have failed to inform the IRS of his use of crypto exchange Bitstamp, prompting the agency to summon data from the exchange about his holdings, as well as public keys and blockchain addresses associated with his transactions.
As the court outlines, Zietzke has questioned the IRS’ actions on six grounds; firstly, that it issued the summons to Bitstamp “in bad faith”; secondly, that it seeks data that is irrelevant to its audit of the Petitioner’s reporting; thirdly, that it already possesses the information that it seeks from Bitstamp.
Zietzke’s three subsequent arguments claim that the IRS allegedly made administrative missteps and — more crucially — has violated his reasonable expectation of privacy in Bitstamp’s records. He has also argued that the U.S. government cannot guarantee the security of any records it receives from the crypto exchange.
Court Concedes One Of Six Arguments Against The IRS
The California court has conceded only one of Zietke’s arguments, noting that he is “correct that the summons is overbroad because it seeks both relevant and irrelevant material.”
The Court States That The IRS’ Summons Would Require Bitstamp To Produce Data That Is Without Due Temporal Limitation:
“Relating to Petitioner’s Bitcoin sales prior to 2016—even though such sales could not impact the gain or loss Petitioner realized if he sold Bitcoins in 2016. In this way, the summons requests information that is irrelevant to the IRS’s stated purpose of auditing Petitioner’s 2016 amended return.”
The court has however refuted all other arguments, finding that the validity of the IRS’ summons fulfills legal precedents and supports the agency’s role in enforcing the tax consequences of crypto transactions.
As reported, Zietke has made a similar attempt previously to quash an IRS summons issued to Coinbase, which was strongly contested by the IRS.
US Lawmakers Ask IRS to Clarify Crypto Tax Rules Around Airdrops, Forks in New Letter
The U.S. taxman’s most recent crypto guidance is sowing confusion, according to a letter from eight congressmen published Friday.
According to a letter penned by Representatives Tom Emmer (R-Minn.), Bill Foster (D-Ill.), David Schweikert (r-Ariz.), Darren Soto (D-Fla.), Lance Gooden (R-Texas), French Hill (R-Ark.), Matt Gaetz (R-Fla.) and Warren Davidson (R-Ohio), the Internal Revenue Service’s (IRS) latest guidance clarifies some aspects of the tax treatment for cryptocurrencies, but leaves much to be desired.
Friday’s letter was first shared by industry think tank Coin Center.
The IRS published guidance around taxing cryptocurrency holdings in October, addressing cost basis and forks, two long-standing questions the crypto community has had.
However, the new guidance raised a number of new questions, particularly around airdrops and unwanted forks. There was also no de minimis exemption for small purchases, such as a cup of coffee.
Friday’s letter pointed to these unwanted forks and airdrops as one major area of concern, noting that the current guidance appears to suggest that individuals are liable for taxes on any cryptocurrencies they gain as a result of a hard fork or airdrop, regardless of whether or not they’re aware they received these cryptocurrencies.
“This creates potentially unwarranted tax liability and administrative burdens for users of these important new technologies and would create inequitable results,” the letter said. “We do not expect this is the intended effect of the guidance, and we urge the IRS to clarify the matter.”
The Letter Specifically Asks:
“Does the IRS intend to clarify its airdrop and fork hypotheticals to better match the actual nature of these events within the cryptocurrency ecosystem? When does the IRS anticipate issuing that clarification?”
“Does the IRS intend to clarify its standard for finding dominion and control over forked assets wherein some level of knowledge and actual affirmative steps taken are necessary to find that the taxpayer has dominion and control?”
“Does the IRS intend to apply the current guidance or any future guidance retroactively, or will the IRS issue proposed guidance that is subject to notice and comment?”
The letter also said the congressmen are “concerned that the form of the guidance appears to indicate that this is ‘established’ law.”
The congressmen wrote that they hope the IRS continues to treat crypto as a “new and developing” area, and hope that the questions listed are answered “as soon as possible.”
The IRS has been ramping up its efforts in taxing crypto transactions, writing letters to exchange users warning they may need to restate their earnings and adding a question about cryptocurrency in its Form 1040.
Friday’s letter is only the latest in a series sent by lawmakers to the IRS asking the agency to clarify how it is approaching the space.
Tax Agencies Step Up Efforts To Hone In On Crypto Tax Evasion
The year 2019, for a short while, raised expectations that stablecoins would bring about mass adoption of cryptocurrencies. 2020, however, seems to be dousing those hopes with ever-tightening regulation that is putting pressure on investors and companies alike.
The first complication came only 10 days into the year. In early January, the European Union’s landmark Fifth Anti-Money Laundering Directive, or 5AMLD, was signed into law. The law is the latest evolution of the EU’s response to the Panama Papers scandal, in which a leak of over 11 million documents uncovered the opaque financial networks used by the world’s richest and most prominent individuals to divert wealth overseas.
The era-defining financial scandal shone a light on a controversial characteristic of international finance that would soon spell trouble for cryptocurrency investors and businesses the world over: anonymity.
Lawmakers are constantly striving to tighten the legal loopholes that allow the world’s richest companies and individuals to avoid paying their dues. Try as they might, there are still states, often small island nations in the Caribbean, that willingly provide less legally restrictive environments.
Choosing to divert financial flows offshore is often not illegal at all, but the emphasis that companies such as the now-disgraced Mossack Fonseca place on privacy means that it is difficult for law authorities to bring individuals using such networks for criminal activities, such as money laundering, tax evasion or terrorist financing, to justice.
From the 5AMLD to central bank digital currencies, governments and regulators are acting on their belief that the identities of individuals behind anonymous transactions should be made available to authorities upon request.
Additionally, even though the United Kingdom is set to leave the EU in roughly one week’s time, its anti-money laundering regulations closely match the 5AMLD, and recent events indicate that measures are being increased even further to prevent cryptocurrency from being used to flout the law.
The Taxman Cometh
One of the criticisms of post-Brexit Britain is that it will relax financial regulation in order to form lucrative trade deals in the wake of its departure from the EU single market. Although the U.K. has seen numerous financial scandals, its tax agency is looking to minimize the blind spots in the defenses against crime involving cryptocurrency.
Her Majesty’s Revenue & Customs announced that it had posted a $130,000 open contract call to develop a tool to help the tax agency gather intelligence through cluster analysis. The announcement is the latest step on behalf of European lawmakers to break through the anonymous qualities of cryptocurrencies, taking aim at both the biggest coins and privacy tokens, such as Monero (XMR), Zcash (ZEC) and Dash (DASH).
As previously reported by Cointelegraph, although most users of such coins use them for entirely honest purposes, both law authorities and regulators are concerned by the potential for privacy coins to be used for nefarious activities, such as the sale of illicit drugs on the darknet, as well as terrorist financing and money laundering.
The regulatory changes and mounting compliance demands did not surprise Dash Core Group Chief Marketing Officer Fernando Guitierrez. In an email conversation with Cointelegraph, Gutierrez put forward his view that the changes will not only be a hindrance to companies but also to the average consumer. He believes that: “This was all bound to happen.” He added that there was little chance that a growing industry would escape unnoticed:
“All these changes will make anonymity more difficult for the average consumer, as more exchanges comply and implement KYC. Those exchanges who don’t will be forced to jump from jurisdiction to jurisdiction, which will impose extra costs that only those committed to anonymity will be willing to pay. For criminals, this will change nothing because they are in that group, among many others who are not criminals, who are willing to pay more.”
The offering of the open contract from the HMRC is a signal that it is committed to effectively ramping up its blockchain forensics capabilities. Rich Sanders, principal and lead investigator at the Cipherblade Ltd blockchain analytics firm, told Cointelegraph that such a small contract is unlikely to shake up the system to any great extent:
“As for this particular initiative, a £100,000 software contract for a year says something but not very much in the grand scheme of things.”
How Effective Are Blockchain Forensics Tools?
While data about transactions using cryptocurrency is stored on the blockchain, it is not possible to identify individuals from this information alone. Prior to the recent changes in legislation, blockchain analytics companies cooperated with intelligence agencies to link suspicious account activity to the individuals behind them.
Although the powers given to law authorities and compliance organizations under the 5AMLD are likely to radically change the way in which such procedures are carried out, Sanders believes that analytics tools are not a one-time fix for all anonymous crypto activity since: “Blockchain analytics tools do not inherently and directly crack the anonymity,” or, more accurately, the pseudonymity, which is an attribute of blockchains. Therefore, forensic tools are only one element of a comprehensive investigative toolkit. He went on to add:
“The way, in which a blockchain analytics tool can help in linking the pseudonymous blockchain identity to an individual is by tracing cryptocurrency from/to initial/terminal destinations such as exchanges and other services, from which data can then be requested — which will often require a subpoena to be served or, at a minimum, another legally constrained form of data request.”
Sanders explained that, when examining the powers of blockchain analytics tools in bringing tax evaders to justice, it is important to note that there must first be pre-existing suspicion of wrongdoing:
“Blockchain analytics tools are likely to be brought to bear only in cases of existing and substantiated suspicion and are not themselves suited to finding potential tax evaders in the sea of cryptocurrency users. If that’s what you want to do, you’ll have a better time — as I once semi-seriously advised IRS employees — browsing through Reddit and looking at the chest-beating about tax evasion there (by accounts with poor OPSEC).”
Many in the sector welcome the regulatory changes. This chummy approach to cooperation with state organizations is not, however, shared by all. Dash Core Group’s Gutierrez told Cointelegraph that, in spite of their duty to protect, not all governments and intelligence agencies honor this:
“This has happened even in democratic countries, so we can’t assume that everything they do is fair or well-intentioned. Only where there is a real separation of powers, and the judicial one has consented, on a case by case basis, they should have such a right, if technically possible. If that can’t be guaranteed — and it can’t — it is better if they stay away.”
How Will Regulation Affect Crypto?
Cryptocurrency is still a young industry and faces many challenges on the road to becoming a mature sector that can compete with wider mainstream finance, should that ever happen. The steady increase in regulatory and compliance demands are only to be expected as the nascent crypto industry inches closer to being used by a greater customer base.
Regardless of the titans of the tech industry toying with the idea of starting cryptocurrencies of their own, even some of the larger financial companies simply cannot take on the high level of risk associated with crypto at its current stage.
Some industry leaders recognize this turn as a welcome sign that digital currencies are being taken more seriously by regulators and lawmakers around the world. For others of a more anarchistic philosophical standing, the loss of anonymity is a loss of one of the core precepts behind the entire reason for cryptocurrency’s being.
Gutierrez says that, while regulation is bound to happen to any growing financial industry, the costs associated with being regulated to an extreme level could well choke out smaller players and lead to an eventual stagnation:
“The constant introduction of new regulations is already changing the industry. Compliance costs have grown so much that only big players can afford them. This is only going to get worse. We will have fewer new projects and that will hinder innovation. I foresee a future, in which the blockchain industry resembles more and more the financial industry it proclaimed it would replace: well-funded players, slow change and lawyers everywhere.”
While Gutierrez foresees a slowdown in the near future, Andrew Adcock, CEO of the London-based crowdfunding platform Crowd for Angels, told Cointelegraph that the firm has not picked up on any discernible change in investor behavior in the wake of the regulatory changes:
“We haven’t seen a large change in investor and consumer attitudes, however, there has been a notable increase from companies seeking to implement changes and abide by the new regulation. I believe this is positive and will provide great protection for investors.”
Although any kind of attempt to hinder the supposedly essential core characteristics of cryptocurrency will create intense debate among investors, industry leaders and regulatory bodies, not all people are so fussed about the changes.
Adcock said that many of the clients at Crowd for Angels are not overly interested in the topic. Despite the doomsayers of the crypto industry, Adcock maintained his view that regulation is something to be encouraged and does not believe that this will alienate investors: “There will always be those who seek anonymity, and this might be challenged by regulation, but harmony between both positions can co-exist.”
Are You Ready For The New Crypto Tax Season?
It’s here! The United States tax season officially started on Jan. 27, and this time, crypto tax is in the spotlight.
Following developments that culminated in theInternal Revenue Service publishing new guidance in October 2019, the bureau has begun to invest efforts in cryptocurrency tax reporting and investigation and is expecting to see an increase in crypto tax reports.
Those who intend to report their crypto activity can skip down to the tips for easy and accurate reports. As for the crypto cypherpunks who are not going to report — these next few lines are for you. Take a moment to realize that times have changed.
The most crucial advice this tax season is to realize that the anti-tax anarchist concept of “tax me if you can” is not going to work anymore. This is not 2011, when nobody knew where this was all going, and there were so few people involved with Bitcoin that the government didn’t care to deal with you.
The cryptocurrency ecosystem is growing — as it should be — and to get into the mainstream, it needs to go through regulation, and that includes paying taxes.
Sure, you can choose to hide and work with all the privacy solutions available to crypto, but understand that if you decide to stay unreported, the option for crypto trading in regulated exchanges along with more crypto services will not be available to you.
The IRS is definitely focusing on cryptocurrency this tax season, as it announced an International Compliance Campaign for cryptocurrency:
“The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams, including outreach and examinations. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practicable.”
Furthermore, the IRS Criminal Investigation, or IRS-CI, division is also focusing on cryptocurrency transactions. In their lastcriminal investigation report, Jim Lee, deputy chief at the division, wrote:
“IRS-CI almost always has jurisdiction. There is no better example of this than in tracing cryptocurrency transactions. Cryptocurrencies are undermining the financial and tax system. Companies pay employees in cryptocurrency or receive crypto for goods/services. They do not pay taxes and entities shift income to offshore exchanges with no reporting requirements, utilizing exchanges with little to no AML practices. Understanding the advancements in this area and staying.”
And if this is not enough, in the last Internal Revenue Service Progress Update Fiscal Year 2019, the IRS set up goals for 2020:
“The last in 2019, the IRS sent educational letters to more than 10,000 taxpayers who may have failed to properly report virtual currency transactions. The letters explained the tax obligations associated with virtual currency and describe how taxpayers can correct past filing and reporting errors. Virtual currency will remain an important focal point for the IRS in 2020. Our enforcement efforts are continually evolving to support the extensive efforts of compliant taxpayers.”
If you are considering reporting, here is what you need to do to get your crypto taxes done and ready with minimal headaches:
1. Before You Get To Calculation And Filing — Collect All Your Data
After accepting the fact that it is time to report your crypto activity, go to the first step of a fully accurate and complete report: data collection. The more thorough you are, the easier the next stages will be:
* Get A Full CSV From All The Crypto Exchanges You Use For Trading And Investing
* Make A List Of All Your Crypto Addresses From All Wallets
* If You Received An Income In Crypto — Collect All Relevant Records
* If You Received Crypto As A Gift, Donated Crypto, Etc., Collect Those Records As Well
* If You Engaged With Crypto Mining, Collect All The Relevant Data Available
* Collect All Records From Airdrops And Forks You Have Received
2. Choose The Right Calculation Method For You
Did you get into crypto early and trade over the years when prices went up? If so, specific identification is the method for you.
Did you buy your first crypto in late 2017 and only sold a few times since then, when the price was at its lowest? You can consider using the first in, first out method.
Make sure you understand each method and its implications for you.
You can save a lot of money by choosing the right method.
The new IRS guidance provides instructions on how to perform specific identification and determined that if you cannot specifically identify your crypto, you should use the FIFO method.
While the specific identification method identifies the exact Bitcoin (BTC) a user has sold, and calculates the user’s tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the FIFO method does not take real-time user activity into consideration, which could result in overtaxation due to the calculation process of all purchases and all sales.
In order to calculate using the specific identification method, you have to identify — using evidence from the blockchain — the purchase dates and sales dates of all Bitcoin that came in and out of your wallet for the same tax year. Then, you must match the purchase and sale dates and prices of the same Bitcoin using blockchain data, and finally calculate the tax liability.
3. Use The Right Crypto Tax Calculation Platform
Choose a platform that will make sure you have a full report, alerts you of missing information, helps you understand what is the right calculation method for you, and meets all IRS requirements.
4. Understand Which Tax Form Is Applicable For You
If you have capital gains, use Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.
If you need to report an ordinary income from crypto, use Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income, as applicable.
5. Better Safe Than Sorry
If you are not sure you got it right, consult a tax professional.
6. Be Aware Of Deadlines
It is a common mistake to forget the filing deadline and end up paying penalties. Individuals who do not get an extension from the IRS must report by April 15.
Crypto Tax Software Developers Get Serious About System Standards
A growing number of crypto tax software developers are trying to bolster their products’ technical credibility with the Certified Public Accountant’s (CPA) stamp of attestation.
Attestation is an independent review conducted by a CPA, whose report includes conclusions about the reliability of data, statements – or systems, in the case of software services.
Lukka and Verady, two competing developers, both announced on Jan. 21 their tax software solutions have received System and Organization Control (SOC) attestation reports from independent auditors. In doing so, the companies’ respective executives told CoinDesk, they are providing services that clients can trust.
“There have been too many instances where crypto enterprises have failed because they utilize systems to provide service that are suspect and become compromised,” said Lukka CEO Jake Benson.
Lukka and Verady both addressed others’ failures by turning to SOC. It’s a set of standards developed by the American Institute of Certified Professional Accountants (AICPA) to assist auditors and users in evaluating a system’s trustworthiness, said Mimi Blanco-Best, CPA, a senior manager at the AICPA and lead developer of its SOC services.
SOC 1 reports on a system’s reporting controls and SOC 2 reports on its handling of user data and data privacy. Within both levels, Type 1 reports evaluate that system’s control design (does it work properly in the moment) and the Type 2 reports evaluate operational efficacy (does it work properly over time).
Lukka received SOC 1 Type 2 and SOC 2 Type 2 attestation reports from Friedman LLP (who was once Tether’s auditor) on Jan 21. Verady’s “Legible” tax platform received SOC 1 Type 1 from Cohen and Company.
Blanco-Best, the AICPA product manager, said SOC attestation reports help a business, and its clients and partners, judge a system and manage risk.
“If I get an SOC report – let’s say an SOC 2 report – that gives me some comfort in the service provided by an organization, that the organization using my data is handling my data properly,” she said.
Comfort leads to trust, and trust builds relationships with otherwise skittish clientele, Verady CEO Kell Canty said. He added that Verady is continuing to work with Cohen and Company to secure the Type 2 report.
Lukka’s Benson said SOC attestation reports help companies break into wider markets, especially with institutions: “They won’t even do business with a software company if they don’t have one.”
IRS Does Not Consider Fortnite Money As Virtual Currency After All
The Internal Revenue Service (IRS) removed wording on its website that put game currencies as examples of a convertible virtual currency. This clarification is important as a new tax filing requirement obliges taxpayers to report whether they dealt with virtual currencies.
The move was first reported by Bloomberg Tax on Feb. 13. Official guidelines on the IRS website indicated Fortnite’s V-bucks and Roblox’s Robux as examples of virtual currencies. A screenshot captured by Bloomberg Tax shows a fairly detailed explanation of the concept, even mentioning blockchain alternatives such as the Directed Acyclic Graph (DAG).
Poor Examples Of A Virtual Currency
The IRS definition of a virtual currency hinges on its ability to “operate like ‘real’ currency,” which means that it needs to be freely transferable between users and easy to exchange for fiat currency.
Spokesmen from Epic Games, Fortnite’s publisher, told Bloomberg that none of these apply to the game’s currency:
“V-Bucks cannot ‘be digitally traded between users,’ nor can they be ‘exchanged into, U.S. dollars, Euros, and other real or virtual currencies.’”
Roblox representatives voiced a similar stance, noting however that Robucks can be exchanged for fiat money under specific circumstances. The transaction is automatically submitted to the IRS, the company added.
The revised guidelines only mention Bitcoin (BTC), striking off a previously existing reference to Ether (ETH) — which should fall under the definition.
Aggressive Stance On Crypto
The U.S. tax enforcement agency has recently made a strong move in its efforts to curb perceived tax evasion facilitated by crypto. Form 1040 now features a straightforward question:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Categorizing game money as a virtual currency would have led to millions of people having to answer “yes” to this question. There are generally few profits to be made from owning game currencies, however.
Given that lying on the form can cost up to $250,000 in fines, this measure was likely introduced to force cryptocurrency users to go through the effort of reporting their gains.
Doing so is likely to be quite complicated. For example, each crypto-to-crypto exchange is considered as a taxable event that has to be reported. Though some hoped that these fall under the definition of a “like-kind exchange,” an IRS official denied this. This definition would have meant that cryptocurrency gains are only taxed when converting to fiat currency.
Cryptocurrency taxation remains an unclear subject, with worldwide regulators having widely diverging approaches. As an example, France does not tax crypto-to-crypto transactions.
A new bill recently proposed in the U.S. Congress could ease the use of crypto for payments by exempting low value transactions from tax returns.
Blockfolio And Tokentax Join Forces To Make Taxes Easier
The deadline for filing 2019 taxes in the United States is quickly approaching. Even for those declaring traditional income, the process can be lengthy to say the least. One of the biggest challenges for crypto holders in the US and beyond is how to declare their crypto assets and not run afoul of the IRS.
Tax Season For Cryptocurrency Holders Made Simpler
Blockfolio and Token Tax are trying to make this process easier for US residents. TokenTax is a platform for crypto investors which can analyze data from crypto transactions and generate the appropriate tax forms, while Blockfolio is a mobile cryptocurrency portfolio. By integrating these two, users can track crypto in Blockfolio, sign up for TokenTax, and immediately be given the option to import all their transactions. TokenTax co-founder Alex Miles notes:
“One of the biggest time sinks for users is how they get their transactions into the Token Tax system. Given how many people already track their transactions in Blockfolio, an integration just made perfect sense.”
As one of the leading networks for mobile cryptocurrency portfolio tracking and management, Blockfolio CEO Edward Moncada agrees:
“We’re thrilled that through this integration and partnership, the already massively time saving TokenTax experience becomes even easier for our users.”
This integration means current Blockfolio users who have already entered their transaction data don’t have to repeat their work on tax forms. All cryptocurrency holders should remember that false or incorrect reporting of assets on their US taxes can lead to major fines.
The IRS Is Inviting Crypto Firms To A ‘Summit’ In DC Next Month
The Internal Revenue Service has invited a number of undisclosed crypto startups to a summit on March 3 to discuss its existing approach to taxing cryptocurrencies as well as enforcement efforts, according to a copy of the invitation obtained by CoinDesk.
Bloomberg Tax first reported the news Tuesday. An IRS spokesperson confirmed the summit is set for next month.
The summit, to be held at IRS’s Washington, D.C. headquarters, will consist of four panels addressing technology, issues faced by exchanges, tax returns and regulatory compliance. A list of panelists has yet to be finalized.
Kristin Smith, executive director of the Blockchain Association advocacy group, told CoinDesk the IRS has been looking into setting up a summit since at least last month, when it reached out to industry participants for suggested panelists.
“My understanding of the event is this is going to be something where the IRS is going to use this as an opportunity to learn from [participants] in the ecosystem but [it] may help inform IRS’s thinking,” she said, pointing to compliance with existing regulation and guidance as one area on which the agency is focused.
While the IRS has not explicitly said the summit will inform its future guidance, Smith said she hopes the agency will use the information it gathers from the event to develop better regulatory frameworks around cryptocurrency moving forward.
The news comes days after the Government Accountability Office, a Congress-funded watchdog for government agencies, announced the IRS had declined to adopt several recommendations to clarify its existing guidance.
The IRS published fresh guidance around cryptocurrencies last autumn, addressing hard forks, how to calculate gains and valuing crypto income. However, the guidance, the first published since 2014, raised new questions around airdrops and did not address small transactions.
IRS Crypto Tax Return Question — Be Careful How You Answer
When you file your taxes this year, the Internal Revenue Service will ask you a simple question: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It’s pretty simple, just yes or no, right? What could go wrong? It’s not really asking for numbers or any detail, though if you sold some it should go elsewhere on your tax return. After all, since the IRS classifies crypto as property, any sale is going to produce either a gain or loss.
Perhaps the IRS is just surveying who is using crypto, you might guess? Not necessarily, and a simple yes or no box can turn out to be pretty important. In fact, given the IRS’s track record with offshore bank accounts, it could even mean big penalties or even jail.
The new IRS question appears at the top of Schedule 1 of your 2019 Form 1040. It explicitly asked if you received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during the year. Tax-savvy people will probably recognize that this is quite reminiscent of the foreign bank account question included on Schedule B.
That is, the question could even set you up as committing perjury for checking the wrong box. Thus, if a taxpayer answers “no” and then is discovered to have engaged in transactions with cryptocurrency during the year, the fact that they explicitly answered no to this new question (under penalties of perjury) could be used against them. So, if you did any of the listed things, you check yes, right?
What if you just have a kind of “signature authority” over crypto owned by your non-computer-savvy parents or other relatives? That way, you can help them manage their crypto. If you sell a parent’s crypto on their behalf, at their request and/or for their benefit, should you answer “yes” or “no” to the question? Either way, should you attach an explanatory statement to the return explaining your relationship to the virtual currency?
There probably aren’t perfect answers to these questions. But what is clear is that answering “no” if the truth is “yes” is a big mistake. Skipping the boxes entirely might not be as bad, but it isn’t good either if the truth is “yes.” If the truth is “yes,” say so, and remember to disclose and report your income, gains, losses, etc. Maybe that’s the point of the question: to be a prominent reminder.
If this makes you realized that you forgot to report your crypto gains in past years, considering amending to fix it. Don’t wait for the IRS to find you, even if you did not get one of those 10,000 IRS crypto warning letters last year. Just remember, the IRS is quite interested in crypto and is taking steps to unearth those who do not report.
The IRS appears to believe that millions of transactions might still be unreported. Taxpayers may think they will not be caught, but the risks are growing — and the best way to avoid penalties is to disclose and report as accurately as you can. IRS Commissioner Chuck Rettig has even moved to increase criminal investigations, too. Last year’s IRS letters to 10,000 crypto taxpayers were just the start.
The new crypto tax question on Form 1099 should tell you something. After all, the Department of Justice’s Tax Division has successfully argued that the mere failure to check a box related to foreign account reporting is per se willfulness. Willful failures carry higher penalties and an increased threat of criminal investigation. The IRS’s Criminal Investigation Division is even meeting with tax authorities from other countries to share data and enforcement strategies to find potential cryptocurrency tax evasion.
Major Crypto Exchanges Lament Outsized Scrutiny From US IRS
Representatives of major crypto exchanges today told the United States Internal Revenue Service that they want to see clear regulations rather than vague suspicion from the tax authority.
In a March 3 panel that is a continuation of a broader crypto summit at the IRS building in Washington, D.C., representatives from Coinbase, Kraken, and major accounting firm RSM US LLP argued that the crypto world had experienced outsized scrutiny from regulators compared to its size and darkness.
U.S. Crypto Exchanges Say They Aren’t That Scary
The representatives from Coinbase — head of global tax information reporting Sulolit Mukherjee — and Kraken — head of global tax Lisa Askenazy Felix — both said that the industry had seen more scrutiny than was merited.
“Even the biggest companies within our space are really not the huge, publicly reported companies right now,” said Askenazy Felix:
“Because it’s such an emerging industry, we are still very much trying to react to all these different developments in all these domestic jurisdictions we might be doing business in and all these foreign jurisdictions we might be doing business in.”
Mukherjee agreed, continuing to affirm that these companies have every reason to cooperate. “There is no benefit to a Coinbase or a Ripple to not doing the right thing,” he said.
The Coinbase executive continued to say that they were seeing excessive pushback from regulators, quipping that “Tax people are not always the most welcoming people in business conversations.”
Overregulation And A Lack Of Clarity
Agreeing with the crypto executives was Jamison Sites of RSM. “All the big players in this industry — Coinbase, Kraken — they’re very much startup companies,” Sites said.
“We’ve seen a number of our clients, we’ve seen a number of non-clients who talk to us — it’s hitting their bottom lines.”
Sites offered a hypothetical instance of overregulation: “Imagine if email in the 80s, when all these startups were coming in, imagine that the US Postal Service came in and said ‘hey, this is unlawful delivery.’”
Askenazy Felix summarized, “I think most of us in the room would agree that there is no clarity today.”
This panel on crypto exchanges is part of a broader March 3 event that the IRS initially invited crypto advocates to in mid-February.
From Taxes To Transparency: The IRS Gets Schooled On Crypto
It is no secret that the United States Internal Revenue Service is working to cope with the unique challenges of taxing cryptocurrencies.
In the first of a series of panels today, March 3, four experts spoke about recent advancements in cryptocurrency technology and the challenges and opportunities they present for regulators.
Public Ledgers Offer More Transparency To Regulators
Jesse Spiro, global head of policy & regulatory affairs at crypto analysis firm Chainalysis, was especially optimistic about the promise that public ledgers hold for regulators — unsurprising, given Chainalysis’s work tracking transactions on such ledgers.
“As technology continues to develop, I think that is going to be a primary concern when it comes to crypto,” said Spiro. “Some people will immediately raise the flag of ‘there needs to be better security.’”
Spiro continued to advance the transparency of the blockchain as an advantage to regulators: “You’re going to see that transaction lifecycle. […] As an investigator, you have a wallet address.”
An audience member who had believed that Bitcoin’s charm lay in its anonymity asked: “So that’s a myth?” Spiro affirmed, “That is a myth.”
Accessing Centralized Data Within Decentralized Ledgers
Despite the potential of blockchain technology, other panelists brought up considerable drawbacks.
Crypto-focused tax software firm Lukka’s director of customer success, Robert Materrazi, brought up the major issue of data centralization among exchanges. Particularly, he challenged Spiro’s confidence in the total availability of blockchain data on the basis of the many exchanges that maintain their own centralized and inaccessible ledgers in order to save transaction fees on the blockchain.
Materrazi said this was less of an issue for U.S. regulators dealing with compliant U.S. exchanges, but maintained that the cast of characters is wide:
“There’s hundreds of those exchanges around the world, there’s new businesses forming […] so it makes it very difficult to control all that data.”
Various Jurisdictions Mean Varying Regulations
Materrazi’s concerns especially touched on exchanges based in jurisdictions with minimal controls. This phenomenon likewise troubled Arnold Spencer, general counsel at Bitcoin ATM operator Coinsource.
Contrasting the situation with his firm’s compliance in the U.S., which he asserted was top-of-the-line, he brought up Argentina:
“We, for a lot of reasons, are interested in Argentina. […] We sought out what we would need to fulfill regulations and that means anti-money laundering, and it turned out there were none.”
Spencer continued to outline the problem of diverse laws within the United States itself, naming New York, with its BitLicense, as the leader of the pack in terms of regulation. However, he noted that many U.S. crypto companies choose to operate in states with less robust laws.
The IRS And Crypto
The IRS issued its first guidance on crypto in 2014, which was only updated recently, in October of 2019.
The full application of October’s guidance has been the subject of some debate, which, as tax time nears, grows in significance.
In December, a group of congresspeople wrote a letter to the IRS asking for greater clarity than even the new guidance provided.
IRS Crypto Summit Was About The Exchange of Ideas, Not Tax Guidance
WASHINGTON — “We might be overcomplicating things,” an audience member at the Internal Revenue Service’s crypto summit said midway through the first panel.
The IRS hosted four panels Tuesday, discussing technology, exchanges, the tax filing process and regulatory guidance in a daylong session uniting industry stakeholders, tax experts and regulators. The goal: Sort out some of the questions and concerns the broader crypto-holding public has about reporting its taxes.
While there were no answers and no new guidance for the industry (though virtual currency did make it to the IRS’s priority guidance plan published Friday), the event still represents a step forward for the opaque regulatory agency, which in a decade has only produced two pieces of binding guidance and published some non-binding documents for taxpayers and financial advisors.
“There’s a clear desire from both industry and regulators to understand this,” Chandan Lodha of CoinTracker told CoinDesk.
Financial advisers want to ensure they don’t have their clients fulfill costly reporting requirements only to discover they didn’t need to, EY partner Michael Meisler said during a panel. At another point a Coinbase vice president asked for clarity about reporting forms.
On the IRS side, numerous agency employees filled the auditorium with questions of their own, asking for clarity on how blockchain forensics works on a technical level, how privacy coins differ from cryptocurrencies like bitcoin (BTC) and even just what specifically they could do to simplify the process for taxpayers.
There is some frustration on the industry side at the lack of existing guidance, and the event did not indicate that any new guidance will be forthcoming. Still, Lodha said the event was a positive step.
Unlike traditional panels, where a moderator asks panelists questions, the IRS event seemed geared from the outset to let audience members and even panelists ask IRS officials to clarify existing tax guidance and address lingering questions.
Calculations And Filing
Specific questions included the best ways to calculate cost basis, how to treat coins bought from different exchanges or transferred between exchanges, whether microtransactions can be exempted and how to marry what tax code says with non-binding guidance published by the IRS so far.
“It would certainly be more helpful … if there was published guidance rather than just these frequently-asked-questions because in the absence of that, what we have is, ‘Well, this isn’t really authority,’” said EY’s Meisler, during a panel on tax return preparation.
It was a common refrain.
Audience members and panelists alike – including Kraken Head of Global Tax Lisa Askenazy Felix, Coinbase tax VP Kyle Zander and American Institute of Certified Public Accountants (AICPA) senior manager Amy Yiqiong Wang – said a lot of confusion stems from the fact that a lot of cryptocurrencies still don’t fall neatly into any existing tax laws.
“The rules don’t exist today to tell you exactly [how] to [file taxes],” Askenazy Felix said during a panel on exchanges.
EY’s Meisler told CoinDesk after the event that he believed it went well, noting IRS Assistant Deputy Commissioner John Cardone opened his panel by telling audience members the tax collector was looking for specific issues of interest to the industry.
“The people that were there from industry were asking questions that were very targeted, whether they develop software that conducts tax calculations or they were from exchanges, they were asking specific questions,” Meisler said.
One key detail that remains unclear is how exactly taxpayers can calculate the value of their digital assets.
The IRS has indicated in its frequently asked questions that individuals who buy and sell crypto at different times can use a method like “first-in-first-out,” meaning if you buy bitcoin in January, March and April and sell in July, August and September, you would calculate the difference in price between the first bitcoin you bought in January and the first bitcoin you sold in July.
However, this may not actually be allowable.
AICPA’s Wang said during a panel the tax code says users “should use specific identity,” meaning the cost should be calculated on the actual specific bitcoin being transacted.
“So there is no binding authority at the moment that allows you to use anything other than specific identification,” she said. “It’s really important for practitioners that the IRS comes out with clarity and guidance saying you can use other forms of tracking basis.”
While there were specific questions, various IRS officials also asked what the crypto industry might see as more basic questions – including “what is an API,” what regulatory arbitrage is and how cryptocurrencies are transacted.
“I’m getting the sense there’s a wide array of sophistication in the room,” said Coinsource’s Arnold Spencer during a panel on technology updates.
Meisler told CoinDesk that having individuals who appeared to have different levels of understanding about the crypto space and technology is not surprising, and having everyone in a room together was likely a good thing.
“Before someone can answer ‘How do we tax cryptocurrency?’ or ‘How do we tax a hard fork or an airdrop?’ it’s helpful to understand what the mechanics of those transactions are,” he said.
It’s unclear whether the IRS will be able to publish anything actionable in the near future. However, there are some steps it can take immediately to clarify its existing guidance. Wang told CoinDesk that just moving its list of FAQs into the Internal Review Bulletin would provide some clarity, a view Meisler echoed.
Because the FAQs are not published in the bulletin, they’re not binding guidance; the IRS can change any recommendations on it as it wishes, which the agency has actually been doing, Wang said.
Some of the questions on the FAQ now appear at different points than when first published.
Turning these questions into binding guidance would give financial advisors and taxpayers the comfort of knowing they were looking at proper legal guidance, which could prevent them from inadvertently violating the tax code.
Crypto.com Simplifies Crypto Tax Reporting For Its Users
Payments and cryptocurrency platform Crypto.com has simplified cryptocurrency tax reporting for its users through a new partnership with three tax providers.
On March 24, Crypto.com announced the collaboration with crypto tax calculator CoinTracker, crypto tax software platform TokenTax and crypto tax reporting firm CryptoTrader.Tax.
Now, Crypto.com’s users can import their historical crypto transactions from the platform into one of the aforementioned tax reporting platforms to generate necessary tax reports. Users then can pass the forms along to a tax professional or transfer to tax filing software for further processing.
A Response To Crypto Taxation Around The World
The new option comes in response to growing crypto adoption, as well as new requirements from regulators around the world making cryptocurrency owners report on their holdings. Thus, last summer, the United States Internal Revenue Service (IRS) began asking digital currency holders to amend their tax filings, while compelling others to pay back taxes and interest and penalties.
At the time, the IRS said that it was focused “on enforcing the law and helping taxpayers fully understand and meet their obligations.” Last October, the IRS issued its guidelines for crypto-based tax reporting, requiring roughly 150 million American taxpayers to answer the question whether they received, sold, sent or exchanged any virtual currency.
At the same time, most members of the European Union have a radically different approach to tax codes to govern their respective crypto sectors. For example, in Germany, Bitcoin (BTC) is not subject to any capital gains tax, thereby allowing investors to avoid paying significant levies on their holdings if the value of their BTC appreciates.
Bitcoin for Business: The Tax Guide
During 2019 alone, thousands of merchants worldwide were accepting Bitcoin (BTC) as a payment method. Despite this, a lot of current and would-be merchants are confused about how to pay taxes on their cryptocurrency sales.
This guide was created by a United States business owner that advocates for cryptocurrency and a crypto tax expert to cover both practical aspects and tax tips for businesses that wish to accept cryptocurrencies. So whether your clients are asking or you desire to support the growth of the crypto ecosystem, here is the right way to do it.
Cryptocurrency Tax Law Varies By Country
Each country has its own tax rules. Some, such as Portugal and France, look favorably on cryptocurrencies, while others like the U.S. and the United Kingdom take a more conservative approach to the asset.
Use the guide above to understand the implications in your country. Keep in mind that a country may use one set of laws for individuals and another for businesses. For example, in Portugal, the laws are more advantageous for individuals.
The rules can also differ from one business to another. In some countries, there are different tax rules for self-employers, companies, corporations and small businesses.
In the U.S., when you receive virtual currency in exchange for performing services, whether you perform the services as an employee or not, you recognize ordinary income. For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.
Make sure you understand whether the current tax rules apply to your business. If you are not sure what rules apply to you, consult a local tax professional.
You May Be Able To Eliminate The Volatility Of Crypto
The volatility of crypto is an issue that affects everyone who ever considers paying with crypto, but if you have a business, you need to take a moment and think about the implications.
There are two main ways to combat volatility. First, accept cryptocurrency payments through third-party service providers like BitPay.
For a fee (as low as 1% in the U.S.), you can instantly get fiat whenever someone is paying you with crypto. Most of those companies are also taking care of the invoicing and record-keeping procedures and dealing with the mandatory Anti-Money Laundering and Know Your Customer requirements.
Taxwise, this option is also very easy: If the crypto is immediately converted into fiat, you are paying tax for regular business income.
The main disadvantage of these companies is that they cannot provide services to everyone. Depending on the type of company and your jurisdiction, you may not be eligible for these services.
The second way to deal with volatility is to either accept stablecoins or instantly convert other cryptocurrencies to stablecoins.
If you choose this way, you will need to issue the invoice for the payment yourself. There are some bookkeeping platforms that support crypto payments, such as Coinbase Commerce.
Since stablecoins are not entirely nonvolatile, when you sell the stablecoins, you will need to check your tax implications, which depend on you and your business’s country of tax residency.
Now that we’ve covered the basics, let’s get to the practical aspects.
Record Every Sale
The first step is easier than you think. For every sale, you need to record the sale date and transaction amount as you would for fiat.
If you use a service like BitPay that instantly converts 100% of the sale to fiat currency, then you are done. Record the final amount minus the transaction fee. Same as you would for a payment processor.
If you do not use third-party payment services, in addition to the fiat amount, make sure to record fair market value amount in crypto. For reference, $50 USD at the time of writing this article is 0.0058 BTC.
Fair market value, or FMV, is typically defined as the selling price for an item to which a buyer and seller can agree.
Cryptocurrency value is determined by the cryptocurrency exchange and recorded in U.S. dollars. However, when it comes to peer-to-peer transactions or other transactions not facilitated by an exchange, the FMV is determined by the date and time at which the transaction was recorded on the blockchain.
The amount of income you must report is the fair market value of the virtual currency in USD when received. In an on-chain transaction, you receive the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.
Additionally, you will need to determine the cost basis for the crypto you have received.
Cost basis is the original value of an asset for tax purposes. For digital currencies, the cost basis is the amount you spent to acquire the digital currency, including fees, brokerage commissions from exchanges, and other acquisition costs in U.S. dollars.
If you provided someone with services and received digital currency in exchange, your basis in that digital currency is the fair market value of the digital currency in U.S. dollars when it is received. For more information on basis, see Publication 551, Basis of Assets.
The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns.
For cryptocurrency payments, it means documenting receipts, sales, exchanges or other dispositions of digital currency as well as the fair market value of the digital currency at the time of transaction.
Now it’s time to “cash-out” into fiat. Because the BTC price fluctuates, each sale has a unique value in BTC.
Cryptocurrency Transaction Log
We send the 0.0269 BTC to an exchange and sell it for 290 USD. There is a 40 USD gain due to appreciation of the Bitcoin price.
When you earn money between the time of sale and the crypto-fiat conversion, you probably need to pay capital gains tax.
It depends on the country, but in the United States, we would calculate the time between the initial sale and the crypto-to-fiat conversion.
In our example and most others, the crypto-to-fiat trade that occurred within 12 months of the crypto purchases will be considered short-term capital gains.
If you decided to hold your crypto for over a year, then the profit would be considered long-term capital gains.
Many people don’t know it, but cryptocurrency tax liability can be significantly reduced by crypto tax planning. The new IRS guidance enables you to plan your taxes by choosing which particular Bitcoin to sell.
Therefore, you can choose to sell the same Bitcoin you purchased when the price was high now at a lower price. This can assist you in optimizing your tax liability. This tax planning method calls for the use of specific identification, a common way to calculate and plan taxes in many countries.
What About The Miscellaneous Transaction And Withdrawal Fees?
This one is straightforward. They are considered expenses, just like traditional banking or processing fees. The fees will reduce your cost basis.
What About Crypto Refunds?
Let’s say a customer wants to return an item and is granted a full refund. Bitcoin has gone up since its purchase. Do we refund their original amount of Bitcoin or the current USD equivalent?
This is usually a case-by-case decision, but most businesses will refund the USD equivalent at the time of purchase because the unit of account is (almost) always in fiat currency.
No matter what you choose to do, make sure you report it correctly and reduce the tax calculation consistently. Keep all fair market value records of the payment receipts and the refund.
We hope you have a bit more clarity on the tax implications for your business. Pay attention to updates as crypto tax regulations evolve in the 2020s.
The Tax Man Cometh — Who Will Pay for the COVID-19 Stimulus?
Could this be the year the world gets serious about cryptocurrency taxation? The coronavirus pandemic, after all, could cost the global economy as much as $4.1 trillion — or almost 5% of global gross domestic product — according to the Asian Development Bank. Governments will soon be looking to tap all possible income sources to balance their budgets, including crypto, say tax experts.
“At some point, somebody is going to have to pick up the bill” for the COVID-19 pandemic and its associated economic stimulus packages, Peter Brewin, a PwC tax partner in Hong Kong, told Cointelegraph, adding: “We can expect revenue authorities to be under pressure to collect more taxes. I see no reason to believe that cryptocurrencies will be immune to this.”
In tune with this, on April 1, the Spanish tax authority began sending out warning notices to 66,000 cryptocurrency holders to remind them of their tax obligations, as Cointelegraph reported. “It’s the Willie Sutton question,” Richard Ainsworth, an adjunct instructor at Boston University’s School of Law, told Cointelegraph. “Why do you rob banks? It’s where the money is. Clearly, untaxed money is in crypto. There will be activity, and it will be significant.”
Paul Beecy, a tax services partner at Grant Thornton, told Cointelegraph that there is heightened awareness of cryptocurrency now in much of the world, and more attention is likely to be directed toward taxing Bitcoin (BTC) and other cryptocurrencies this year.
But not everyone concurs. “The IRS and other agencies around the world will be stretched thin with the ‘direct’ tax fallout resulting from the pandemic, like administering relief programs,” Omri Marian, a professor of law at the University of California, Irvine, told Cointelegraph, adding that there isn’t enough revenue to be collected from crypto assets to make them a major priority for tax agencies. “I expect tax enforcement in the context of crypto assets to be about the same, or lower, going forward.”
The Crypto Taxation Challenge
Cryptocurrency taxation has long been problematic. An individual in the United States, for example, may have to pay a capital gains tax when purchasing a single cup of coffee with BTC. The U.S., however, isn’t unique in this regard. Grant Thornton’s Beecy regularly asks his non-U.S. colleagues about their country’s treatment of Bitcoin purchases. Most, like in the U.S., have to keep track of every purchase (at least in theory), including cups of coffee.
“Yes, it’s a taxable disposition. Germany is an exception: Under rule 23 EStG, Germans can trade crypto tax-free — provided that their capital gains do not exceed a total of 600 euros per year,” he told Cointelegraph. Germans pay no capital gains at all if the crypto is held for more than one year.
According to Brewin: “Most countries do not have specific tax laws for cryptocurrencies. Instead, they try to fit the taxation of crypto assets into existing tax laws and many have started to issue guidance on how they interpret existing laws.” One problem here is that it has led to inconsistent treatment around the world.
Three Tax Structures
Brewin breaks it down into three basic tax regimens in different global jurisdictions. Individual residents in Group 1 jurisdictions such as the U.S. and the United Kingdom (by far the largest) should almost certainly keep records on all of their crypto spending and may have to pay taxes on any gains they make when they use their crypto to buy goods or services. These countries apply a broad-based capital gains tax, and Brewin believes that “it’s very unlikely that such jurisdictions are going to make changes to their capital gains tax regimes to exempt crypto assets.”
Group 2 residents — e.g., Hong Kong, Singapore — enjoy an advantage over those in Group1, as those jurisdictions do not levy taxes on capital gains. Therefore, there is no need to keep records of or calculate tax on their gains/losses with regard to crypto spending “as long as they are not deemed to be in a business of trading in cryptocurrency,” said Brewin.
Group 3 jurisdictions like Portugal and Malta do not require taxes to be paid, but this could change, depending on whether the current treatment has arisen by accident (i.e., the rules just haven’t been updated fast enough to include crypto) or by design — that is, an explicit government policy decision to exclude the asset class.
For Group 3, crypto could be subject to future legislative actions — particularly if governments are looking to raise income in a post-COVID-19 world, observed Brewin, adding: “The tax treatment may differ depending on the type of asset — e.g., securities tokens may be treated differently from payment tokens like Bitcoin.”
“Not The Best Outcome For The Tax Guy”
“Crypto has special attributes that make taxing it very difficult,” said Ainsworth, adding that, for instance, it’s often difficult to attach names to transactions. Taxing cryptocurrency primarily through an income tax — as opposed to a sales tax, or VAT — leads one inevitably to a property tax/capital gains outcome.
“So, David Hedqvist who just buys Bitcoins low (for Swedish Crowns) and sells Bitcoins high (for Swedish Crowns) has no VAT liability, just income tax,” Ainsworth explained, referencing the judgment in the Skatteverket v. Hedqvist case in the European Court of Justice and elaborating:
“That’s not the best outcome for the tax guy because we can find the transactions much more easily than we can find the people behind them. The further trouble with the income tax is that we get most compliance from the withholding (and third-party reporting) systems. It’s really not a ‘voluntary compliance’ system. We comply because the government knows about us.”
The whole idea of crypto, though, is that ownership is (semi) anonymous, which tends to neutralize the withholding and reporting systems, continued Ainsworth, who was the former deputy director of the International Tax Program at Harvard Law School. He added: “Unless we want to spend a lot of enforcement resources connecting people to crypto, we are really not going to get anywhere fast.”
Ainsworth suggested, instead, to demand a withholding (per crypto transaction) from the cryptocurrency exchanges because then “it would not matter who was engaged in the transaction, or what was involved in the transaction, just that there would be a charge (tax) involved in each transaction collected and reported by the exchange. The charge would be a flat percentage.”
The Portuguese Alternative
If crypto taxation is unwieldy, inconsistent and difficult to enforce in most jurisdictions, are there still places that are getting it right? In Portugal, for instance, individual crypto trades are not taxed — just trades from professional activities, that is, if trading crypto is a core business. Is this a better model?
The Portuguese way probably isn’t applicable to the U.S., suggested Beecy. With regard to Bitcoin, for instance, “the IRS has already given guidance: This is property and it is subject to taxation.” Is the government suddenly going to change gears — and exclude an entire asset class from taxation? That would be politically explosive, he suggested.
In most countries, tax outcomes for crypto assets are just a result of applying regular tax laws, said Marian. Most do not have a tax policy specifically designed for crypto assets, as appears to be the case in Portugal. “The only countries that I am aware of that designed specific lenient crypto assets tax policies are all traditional tax havens, and this tells you all you need to know.”
What’s The Endpoint?
Where, then, is the world likely to end up with regard to cryptocurrency taxation — if it is even possible to generalize? Beecy expects to see in the U.S., and maybe other nations, a bifurcated tax scheme with a split between digital investors and digital consumers.
The former will be subject to fairly onerous reporting requirements, but they will be assisted by software packages that automatically track and consolidate an investor’s transactional information — often linked to a digital wallet. The investor would have access to all buys, sells, gains, losses, as well as consolidated monthly reports and annual reports, “just like the typical brokerage accounts.”
Meanwhile, digital consumers will increasingly purchase everyday goods and services with stablecoins, which, while taxable in theory, basically have no gains or losses to compute. Crypto transactions — purchasing a shirt or a slice of pizza — will be fairly frictionless. Mazhar Wani, a PwC tax partner in San Francisco, agreed that stablecoins could play a role, telling Cointelegraph:
“In the context of taxes, the key problem with using crypto assets for day-to-day spending lies in its volatility compared with the local currency. The obvious solution is adoption of a digital currency that doesn’t exhibit this volatility versus local fiat currency — some form of stablecoin.”
Wani would like to see jurisdictions start viewing crypto and digital assets through a fresh lens — i.e., not as a property, currency, security or commodity — with an end toward “establishing one globally consistent policy and framework around it with some sort of de minimis exceptions to be established locally to minimize burdensome compliance, reporting and enforcement activities.”
A Role For The United Nations?
A more idealistic proposal was developed recently by Ainsworth and Tony Hu, a graduate student at New York University’s tax law program, in a working paper where they call for a supranational and trusted body like the United Nations to administer tax revenues raised by a transaction tax on exchanges. As Hu told Cointelegraph:
“For example, when a jurisdiction is battling opioid pandemic, a plight typically associated with cryptocurrency, it could apply to the administering body [e.g., the U.N.] for appropriate funds proportionate to the crisis’s scale and severity and use the funds to reduce instances of overdosing and develop more advanced technology to detect opioids at port of entry.”
A supranational solution? “I think that’s aspirational,” commented Beecy. “I understand it, but the challenge is: Will nations give up their sovereignty?” This would mean that countries would have to relinquish their prerogative to tax the property of their citizens. Brewin, too, believes that most countries will strive to retain all their tax privileges, and he doesn’t foresee much global convergence on how crypto is taxed. The exception may be with respect to information reporting:
“I’d be very surprised if we don’t start to see tax authorities cooperating to require more disclosure from exchanges, custodians or wallet providers on their customers and then sharing this information with each other — for example via expanded applications of the common reporting standard.”
Beecy can see groups of central banks, like those in the European Union, developing cohesive policies to facilitate cross border digital currency transactions. But a crypto transaction tax with proceeds going to the U.N. to fight pandemics or the like? “I think that’s just a bridge too far,” he told Cointelegraph.
Fifth-Largest US Accounting Firm Partners With Crypto Tax Tech Company
Blockchain-native software and tax services company, Lukka, has been chosen to provide crypto taxation software to the fifth-largest accounting firm in the United States, RSM.
Cointelegraph spoke to Lukka CCO Jeremy Drane, and RSM senior manager of international tax and blockchain/cryptocurrency, Jamison Sites, to find out more about the partnership between the two firms.
Lukka Provides Crypto Tax Software To RSM Clients
The deal will see RSM’s tax clients provided with the ‘Lukka Crypto Office’ and ‘LukkaTax for Professionals’ software to assist the tax preparation needs of both individuals and enterprises.
Jamison Sites states that RSM began researching various crypto tax software providers after having conversations with the U.S. Treasury and Internal Revenue Service (IRS) in late 2018 and early 2019.
From the discussions, Sites asserts that “RSM understood that upcoming IRS guidance would require our digital asset clients to prepare a much more complicated calculation going forward.”
After evaluating the crypto tax software sector, RSM chose Lukka based on its “scalable infrastructure” and “focus on delivering highly specialized tax capabilities unique to crypto assets.”
RSM Engages Lukka In 2018
While talks regarding the current partnerships began during August 2019, Sites states that RSM engaged Lukka late in the 2018 tax-year regarding a client who urgently needed roughly $20 million worth of crypto trades to be calculated.
“[W]e had a client that needed an urgent basis calculation for a large volume of trades, roughly 20 million. Lukka’s team came through with impressive results,” he states.
Lukka CCO Jeremy Drane states that the two firms “have been collaborating and working on client-specific crypto tax issues” since RSM first engaged Lukka.
“Since then, the two firms maintained regular correspondence to discuss market news as well as tools and features the RSM tax teams desired in a digital asset software,” he said.
Lukka Launches Academic Repository For Crypto Tax Issues
During March, Lukka launched its ‘Lukka Library’ — comprising an interactive repository of academic work dealing with crypto taxation issues.
The library includes resources covering more than 75 topics and authored by more than two dozen academic and legal experts.
IRS Seeks Third-Party Contractors To Help With Taxpayers’ Crypto Calculations
The United States Internal Revenue Service is reportedly soliciting outside contractors to assist with calculations of cryptocurrency users’ transactions.
The United States Internal Revenue Service (IRS) is reportedly soliciting third-party contractors to assist with calculations of cryptocurrency users’ transactions.
Crypto tax software firm CryptoTrader.Tax publicly shared details of a letter it claims to have received from the IRS on May 12, together with an accompanying Statement of Work.
The latter has been uploaded to CryptoTrader’s blog, along with excerpts from the letter, which reportedly stated:
“The Internal Revenue Service is engaging outside contractors to assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency. We are placing a few single-case contracts as pilots with a goal of publishing a solicitation and request for proposal for a larger multi-case contract.”
The Statement of Work provides detailed information as to the type of services sought by the IRS.
CryptoTrader.Tax says it does not intend to pursue the contract, emphasizing its focus remains serving its customers and assisting them in their tax reporting obligations directly.
What Does The IRS Need Help With?
In order to support its examination of taxpayers using cryptocurrencies, the IRS is seeking a third-party to provide services that can help to aggregate, value and compute the gains and losses incurred by individuals’ cryptocurrency transactions.
This process may, in some cases, be relatively simple, the IRS notes, but in others transactions may be dispersed across multiple exchanges and digital wallets.
The IRS provides further insight into some of the challenges involved in handling crypto transaction data, noting that:
“Specialized technology and infrastructure is required to digest, contain, and analyze virtual currency data due to unique requirements such as but not limited to decimal place precision, varying field formats, and file formats.”
Beyond data management and analysis, the IRS seeks help with report preparation, data discrepancy analysis, error resolution and report revisions.
The contractor would also be expected to be present at taxpayer meetings and to assist the IRS with trial preparations. They would potentially be asked to testify at trials as a summary witness in order to explain the calculations derived from the underlying data.
Notably, the IRS reveals the scope of the data it expects to be marshalled for analysis and calculation, which could include but is not limited to:
“Publicly available on-chain data and private off-chain data; API keys obtained through exchanges, wallets; CSV, Excel or PDF files from various sources; paper documentation submitted by taxpayers; data obtained through merchant electronic systems; related data obtained by the contractor for valuation purposes.”
As reported, the IRS has released two recent pieces of detailed guidance for taxpayers who engage in transactions involving digital currency. These provide insights into hard forks and airdrops, recommended calculation methods and necessary documentation.
How You Could Save Money When Reporting Crypto Taxes
There is no denying that you should be paying taxes on your income from crypto, but how can you ensure that you are not paying more taxes than you owe?
Many crypto holders are reporting their crypto transactions for the first time as a result of the United States Internal Revenue Service’s question about “virtual currency” on the 2019 tax return form.
It is a big question for some taxpayers — many have not reported their crypto gains in the past or may have done so without a great deal of precision. Should a taxpayer let bygones be bygones or file an amended return to accurately reflect their historical income from crypto? The IRS subpoenas of crypto exchanges for taxpayers’ trading histories certainly raise the stakes. To layer more on, statutes of limitations, potential penalties and/or IRS leniency may vary based on the degree of previous noncompliance.
Decisions in one tax year have consequences in future years. This is because gain/loss amounts vary based on which crypto assets are treated as purchased or sold and when these trades occur. Sale of an asset in one year raises the question of how or when a taxpayer acquired that specific asset in the past. If an acquisition was the fruit of mining, staking or an airdrop that was not reported, a taxpayer may need to explain why this transaction was not reported as income on their previous year’s tax return.
Given the recent changes and uncertainties, new software has been designed for investors, traders and other participants in the crypto ecosystem. Such tax compliance software is necessary because, unlike traditional financial assets, trading and other activities in crypto are not reliably reported — or often not at all — on IRS information returns (such as 1099 forms).
Trading in cryptocurrency differs from trading in traditional financial assets in a variety of ways. This includes the movement of taxpayer assets across exchanges in nontaxable transactions, paying fees in capital assets (rather than cash), differing tickers from one exchange to the next, decimal precision and the unique transactions that only occur in the cryptosphere. These are some of the reasons why traditional or generic tax compliance software often falls short in serving the crypto ecosystem.
However, Not All Crypto Tax Software Is Created Equal:
- Some ignore fees associated with transacting in crypto that typically leads to an overpayment of tax on gains or an understatement of losses — which can be used to offset taxable gains. It’s important for your software to properly account for transaction fees so your taxable income is not overstated.
- Some do not properly address the uniqueness of crypto data, such as the differing tickers across exchanges for the same asset and varying decimal precision. Mistakes in these two areas can lead to inaccurate taxable income calculations and risk of an audit.
- Some do not provide sufficient flexibility for the particular taxpayer’s circumstances or blindly apply imprecise or generic tax principles. This rigidity can have adverse financial consequences for taxpayers in the absence of detailed IRS guidance. One example is the reporting of airdrops, mining and staking rewards where some taxpayers believe the IRS’s guidance is too broad when applied to different factual variations. Another example involves the potential for claiming ordinary, rather than capital, loss treatment for certain crypto assets. Ordinary losses are often easier to use for reducing taxable income.
- Some offer taxpayers accounting methods for crypto that are impermissible in the United States — e.g., average cost — without adequate warnings. Others do not support or display the benefits of tax optimizing methods that allow taxpayers to identify assets with the highest tax bases as the ones sold, a method known as highest-in, first-out.
- Some only match acquisitions and dispositions on a single exchange rather than across all of a taxpayer’s different trading venues. This can have a material impact on taxable income calculations. Generally, this will also result in non-optimal taxable income calculations when applying different accounting methods such as first-in, first-out, last-in, first-out and highest-in, first-out.
- Some were developed in a vacuum and not subject to the rigors of independent audits for Service Organization Controls relevant to software-as-a-service providers. Only crypto software providers with the highest level of internal controls for reporting, security, privacy and processing have both SOC 1, Type 2, and SOC 2, Type 2 certifications. The use of software without these certifications increases a taxpayer’s risks — both tax and non-tax related.
The list goes on, and there are even more points that can be made in choosing the right crypto tax software for an area where there is little specific tax guidance. The lack of specific guidance for crypto does not mean that there are no rules, however. It just means that a finer-tooth comb is needed to determine which tax rules apply to crypto, and how that application differs from traditional financial assets.
There can be advantages to such an analysis that can significantly reduce tax expenses or increase a taxpayer’s refund. A flexible tool is often needed to help users make informed decisions that can ultimately save taxes or increase a refund.
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