On July 2, the Internal Revenue Service (IRS) announced its intention to address noncompliance related to the use and trading of virtual currencies, also known as "cryptocurrencies." The announcement was short on specifics, other than to say that future guidance may be forthcoming. Taxpayers are, therefore, left in a familiar position: attempting to comply but with little information about what their actual tax and reporting obligations are.
Notably, the IRS has been slow to react to the rapid growth of the cryptocurrency market, which includes household names like bitcoin and Ethereum traded on widely used platforms such as Coinbase, but also a significant number of lesser‑known currencies traded by U.S. taxpayers on exchanges all over the world. By some estimates, the global cryptocurrency market is close to—or has already exceeded—$1 trillion. In 2014, the IRS released Notice 2014‑21, stating that the IRS would treat virtual currencies as "property" for federal income tax purposes. Since then, however, the IRS has been essentially silent on these issues. Notice 2014‑21 leaves unanswered many significant questions about virtual currency, such as whether it could (under pre‑2018 law) be exchanged tax-free for "like‑kind" property, and, if so, what property is like‑kind with respect to virtual currency or particular virtual currencies.
The recent IRS announcement may be prompted by the lack of tax receipts collected by the U.S. Treasury stemming from cryptocurrency trading. It may very well be that a significant number of U.S. taxpayers trading these virtual currencies have simply not reported their gains from such trading. In what could be perceived as a warning shot, the IRS states in its announcement that taxpayers "with unreported virtual currency transactions are urged to correct their returns as soon as practical" and, importantly, that the IRS "is not contemplating a voluntary disclosure program specifically to address tax non‑compliance involving virtual currency."
What remains unclear is how taxpayers should report their income and loss from cryptocurrency trading activity, particularly since most platforms and exchanges are not providing taxpayers with the tax forms (i.e., Form 1099) issued by traditional broker‑dealers or investment firms. Under Notice 2014‑21, tax and reporting obligations associated with virtual currencies are determined in accordance with general tax principles applicable to all property transactions. While such guidance provides a reasonable baseline for compliance, many questions remain unanswered. Without more specific guidance, it is unclear whether this latest warning from the IRS will actually result in increased compliance from U.S. taxpayers.
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