Why the IRS Needs to Release Cryptocurrency Tax Guidance

Wendy Walker
July 11, 2019

Despite IRS Commissioner Charles Rettig’s promise of “within the next 30 days” more than 30 days ago to Congress regarding the release of forthcoming cryptocurrency tax guidance, we have not seen anything materialize. 

As we mentioned previously, the ongoing confusion related to tax reporting obligations continues to plague payers such as crypto or digital currency exchanges. And that confusion, can lead to negative tax consequences for taxpayers, too. As just one example discussed in online chat forums this year, many taxpayers in the cryptocurrency community complained of not receiving Forms 1099 to help them with computing their tax obligations. Others received a Form 1099-K, which does not represent actual earnings, and they aren’t sure how to calculate the actual taxes due.  

Emmer moves to protect taxpayers of “forked assets”

Maybe as a lack of response from the IRS, Rep. Tom Emmer (R-MN) reintroduced the Safe Harbor for Taxpayers with Forked Assets bill, according to a July 9th press release. This bill proposes a safe harbor for taxpayers who are attempting to report gains or losses associated with forked digital assets.  

“Forks” are splits in digital assets that result in two independent digital ledgers, for example, Bitcoin and Bitcoin Cash. The bill would provide assurance for taxpayers that they would not be penalized for reporting this information to the IRS. The prohibition on penalties would continue until the IRS establishes a set of rules regarding the tax treatment of forked cryptocurrencies.

It’s not surprising that Emmer took this step. Members of Congress have requested clarification from the IRS on forked assets multiple times.

Paralysis in the payer community over cryptocurrency tax compliance

As the summer wears on with no response from the IRS, payers in the cryptocurrency community grow increasingly concerned with whether they will be able to quickly react to any guidance that may be released this year.  

In Commissioner Rettig’s response to Congress in May, the commissioner specified that clarity would include “(1) acceptable methods for calculating cost basis; (2) acceptable methods of cost basis assignment; and (3) tax treatment of forks.” Cost-basis information is generally provided to taxpayers via Form 1099-B for securities-related transactions, and it is a complex reporting methodology for payers to implement and maintain.  

Further, there are many questions related to the variety of details needed for cost-basis calculations that remain unanswered, including how to assign fair-market value to an asset and calculations related to the treatment of short-term versus long-term gains and losses.

The result is paralysis in the payer community. Payers do not want to implement tax technology solutions with the possibility looming that requirements may change. Those payers that have already implemented solutions may need to completely revamp those processes as a result of new or changed obligations. 

Climate of non-compliance needs to be addressed

The IRS has an obligation to educate taxpayers, and that includes the payer community struggling to provide crypto investors with Forms 1099 and accompanying information needed for tax compliance. As Nina Olson wrote in the National Taxpayer Advocate’s 2008 report, “The IRS needs to produce specific early guidance on difficult issues confronted by taxpayers on a regular basis in emerging areas of economic activity. Otherwise, it risks turning these taxpayers into unintentional tax cheats, establishing noncompliance norms in the industry, and leaving IRS employees without clear guidance about how to do their jobs.”  

Despite the fact that the IRS issued Notice 2014-21, providing limited guidance on crypto tax policy, five years ago, it was clear to the government by 2016 that noncompliance norms existed in the cryptocurrency community and that it was contributing significantly to the tax gap. In its defense of the subpoena in United States v. Coinbase, the IRS argued that “there has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.” 

Tax season is right around the corner

It may sound bold to state that tax season is upon us given it is only just after the 4th of July, but for a lot of tax professionals, tax information reporting season is a year-round concept. In August, payers will receive annual penalty notices via the 972CG Proposed Penalty process. In October, payers will receive B notices via the CP2100 process. And in November and December, Payers begin testing and preparations for the very busy month of January. Sovos has documented this process in this past.  

We implore the IRS to release guidance with haste. Further delays will impact payers’ ability to implement requirements in time to effect the coming tax season and also comply with other obligations in the coming months.

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Author

Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
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