Lack of Clarity in Cryptocurrency Regulations Hasn’t Stopped IRS Enforcement

Gerry Nelligan
November 15, 2018

The IRS is getting ready to inundate tax professionals with guidance on taxation of cryptocurrency. When, exactly, that will happen is unclear. What is clear, however, is that the agency plans to enforce existing 1099 reporting regulations for crypto for now, something it has already shown a willingness to do. The question is how those regulations will continue to take shape.

The IRS is clearly intent on bringing crypto platforms and investors into reporting compliance. Just one year ago, the agency ordered a major crypto platform to hand over a list of its users in an effort to drive tax revenue from transactions. The Securities and Exchange Commission also now requires platforms to register as national security exchanges, a move that has put further pressure on them to report transactions to the IRS.

Murky regulations for 1099 crypto reporting but a promise from the IRS

However, regulations surrounding 1099 reporting for crypto transactions are still a bit of a mess. The Tax Cuts and Jobs Act (TCJA), passed in early 2018, opened the door for the IRS to broaden reporting requirements for crypto assets. What the IRS hasn’t done recently, though, is offer any further clarity on how crypto platforms and investors should report their transactions to the government.

IRS Notice 2014-21, now four years old, is still the only guidance on crypto taxation the agency has ever released, and the document is neither comprehensive nor final. In fact, the Notice remains open, with the IRS soliciting suggestions, according to a recent Tax Notes report.

The new head of the agency says there is more to come on crypto. Charles Rettig, the new IRS commissioner, promised in mid-November that “the IRS will have more information about [crypto] than you could ever imagine,Tax Notes reported, and suggested crypto followers “pay attention to informal guidance as though it’s formal guidance.” However, Rettig did not offer a date for when the IRS might release guidance of any kind.

Frustration for IRPAC in a lack of IRS clarity

A prolonged lack of clarity will likely only serve to further frustrate IRPAC, the Information Reporting Program Advisory Committee, which serves as a forum for businesses and the IRS to communicate. IRPAC recently requested clarification on crypto-related regulations, as the October 2018 IRPAC Public Report details:

“[M]any industry and tax practitioners still question other tax consequences of cryptocurrency transactions. For example: Can cryptocurrency be considered a specified foreign financial asset? How is the basis determined for cryptocurrency that is sold? Does broker reporting apply to cryptocurrency transactions? Therefore, IRPAC recommends that the IRS issue further guidance on the tax consequences of cryptocurrency transactions.”

IRS offers no cryptocurrency information in latest guidance

Investors and platforms in the crypto universe had hoped for some concrete messaging from the IRS on crypto taxation and tax information reporting, but Tax Notes reports that, Rettig’s comments notwithstanding, updates to Notice 2014-21 seem unlikely to arrive soon. The 2018-2019 Priority Guidance Plan, set forth by the Department of the Treasury and the IRS,  doesn’t mention crypto at all, and the agency is evidently so busy detailing other changes related to TCJA that crypto-related issues are not currently a priority.

So, while the IRS has demonstrated a willingness to enforce existing 1099 reporting rules, it has not followed up by providing details on those rules. Currently, trading platforms might have to send 1099-B forms to users who exchange one type of coin for another, but they’re not required to send the forms the way brokers do for stock trades. Requirements surrounding issuing the 1099-B remain unclear.

Simple crypto investments that don’t involve coin exchanges are reportable on form 1099-K. However, the reporting threshold for the form, which is used to report online payments processed by companies such as rideshare and home-share services, is very high–$20,000 and 200 transactions per year. (Two state exceptions are Massachusetts or Vermont, where the threshold is $600 with no minimum number of transactions.) That leaves the vast majority of crypto investments out of being reportable.

Crypto platforms need to prepare for IRS rule changes

The crypto industry needs and wants clarity on the IRS’s requirements, but with none forthcoming, all platforms can do is get themselves in compliance with current regulations and prepare for inevitable changes to come.

With the IRS already cracking down on crypto platforms and seeking to drive revenue from transactions, and with the agency promising to further address the industry at some point, this is the time for platforms to invest in a solution that will enable them to stay compliant now and in the future.

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Author

Gerry Nelligan

Gerry Nelligan is a Regulatory Analysis Supervisor at Sovos, leading a team of counsels covering information reporting, including 10-Series IRS reporting, Affordable Care Act (ACA) reporting and Automatic Exchange of Information (AEOI). Gerry received his J.D. from Suffolk University Law School and his B.A. from Providence College. He is a licensed attorney in the state of Massachusetts.
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