After four separate letters from members of Congress urging the agency to release clarification on cryptocurrency taxes, IRS Commissioner Charles Rettig finally responded to Representative Tom Emmer, R-Minn., on May 16, with confirmation that clarification is forthcoming. While Rettig’s letter did provide some specifics on what the guidance would cover, it did not include a timeframe for further information.
The IRS has felt pressure from several stakeholders to clarify crypto regulations. Crypto traders, tax practitioners and tax professionals have been clamoring for feedback since the IRS released Notice 2014-21, still the agency’s only formal guidance on crypto taxation, more than five years ago. That Notice was notoriously incomplete, as it did not address specific transactions such as forks and left a lot of questions unanswered about what income to report and how.
Confusion over 1099 reporting for crypto
The lack of guidance has caused confusion for both crypto trading platforms and investors. US payers of income are required to impose tax withholding and information reporting on Form 1099 for income paid to recipients. Failure to do so results in unlimited liability for taxes that should have been withheld plus penalties for failure to comply with withholding and information reporting requirements. Notice 2014-21 alluded to potential obligations for a Form 1099-B, 1099-MISC and even Form 1099-K, but none of the instructions or publications related to those forms was ever updated with any details to guide taxpayers beyond the Notice.
A lack of clarity as to how crypto transactions should be treated for income tax purposes, coupled with confusion about how US payers should report those transactions, has led to significant underreporting of income to the IRS estimated to total billions of dollars.
Specifics on what guidance will include
In his letter to Rep. Emmer, Commissioner Rettig reiterated that Notice 2014-21 guided filers towards existing property rules when virtual currency is used as a medium for exchange or for investment, and that the IRS has been evaluating numerous comments and collaborating with the industry in order to identify areas where additional guidance was needed. Specifically, the Commissioner indicated that guidance would include “(1) acceptable methods for calculating cost basis; (2) acceptable methods of cost basis assignment; and (3) tax treatment of forks.”
With the IRS finally making a move toward taking concrete action on crypto taxation, payers need to make sure they are in compliance and are able to manage forthcoming regulatory changes as the IRS releases them. Cost basis reporting is complex and requires a modern tax solution to tackle high-volume transactions and complicated calculations.
Find out how Sovos solutions have helped crypto exchanges comply with Notice 2014-21 as well as how Sovos can enable organizations to comply with the coming changes to IRS requirements.