Congress Puts Pressure on IRS to Clarify Cryptocurrency Tax Policy

For the second time in less than a year, members of Congress have sent a letter to the IRS imploring the agency to provide guidance on its policy for cryptocurrency taxation and related tax information reporting. This time, there is a deadline for the IRS to respond.

Led by Minnesota Republican Tom Emmer, 21 members of Congress addressed a letter to IRS Commissioner Charles P. Rettig in early April requesting a written response by May 15 detailing the agency’s effort to clarify regulations for cryptocurrencies, including topics to be covered and a timeline for release of guidance.

Latest in a series of crypto letters to IRS

The letter is the second in less than a year from Congress to the IRS on the topic and the fourth since the IRS provided limited guidelines on crypto taxation in 2014 with Notice 2014-21. In September, Ways and Means Committee Chairman Kevin Brady and four other members of Congress addressed a letter to then-IRS Acting Commissioner David Kautter.

Each letter has taken an increasingly aggressive tone. The most recent letter asks for clarification on three specific issues:

1. Acceptable methods for calculating the cost basis of virtual currencies. Which specific methods does the IRS consider to constitute “a reasonable manner that is consistently applied,” as required by Notice 2014-21?
2. Acceptable methods of cost basis assignment and lot relief for virtual currencies. Do taxpayers need to use specific identification whenever they spend or exchange virtual currency, or are other methods, such as first-in-first-out or average cost basis, acceptable as well?
3. The tax treatment of forks for taxpayers that use virtual currencies, such as the 2017 hard fork of the Bitcoin blockchain.

A reticence to pay tax on crypto earnings

Last year, Fundstrat Global Advisors estimated US cryptocurrency-related tax liabilities at $25 billion, based on gains of $92 billion, according to ETHNews. However, crypto investors have shown reticence to pay taxes, with 80 percent of respondents in a recent online poll saying there was “not a chance” they would pay taxes on crypto earnings.

It doesn’t help that the IRS has promised to clarify crypto tax regulations but hasn’t yet done so. Confusion still remains over whether Form 1099-B for securities transactions or Form 1099-K, used by online payment processors to report goods and services transactions, is the form crypto exchanges should use for reporting tax information to customers and the IRS.  

Depending on the Form 1099 received, the investor’s income tax obligations could be different.  Form 1099-B is used in conjunction with Form 8949 to calculate short-term or long-term gains or losses. Form 1099-K income is generally offset by itemizing deductions under the various schedules now accompanying Form 1040. It’s no wonder investors don’t want to report their crypto earnings; depending on how they claim the income, the rates of taxation could be different.   

In recent weeks, the SEC released guidance and provided detailed interpretations of its conclusions citing specific transactional details. The guidance provided clarity to the industry in terms of which offerings are treated as a securities versus those that are not. Crypto exchanges and investors, and Congress, are waiting for similar direction from the IRS.