In News Release IR 2019-132, the IRS states that as of last week, it is beginning to send letters to owners of cryptocurrency that are focused on crypto-transactions within a wallet the taxpayer may have had. By the end of August, more than 10,000 taxpayers will receive these letters. Their names were obtained through various ongoing IRS compliance efforts.
Notice 2014-21 states that the IRS deems crypto-transactions as property instead of a currency. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
Congress and the AICPA has sent letters to the IRS in early 2019 asking for clarification on crypto-transactions. In Congress’s letter, a follow up to one published in 2017, they call for the agency to “expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies.” The main crux is for the IRS to further their position on the tax treatment of crypto-transactions.
For example, today, a business owner can pay an employee in Bitcoin. Not only are the wages taxable as wages paid on the date they were considered earned, but there is another taxable event that occurs when the employee converts the Bitcoin to U.S. dollars. This is due to the conversion rate of the Bitcoin from the time it was received to the time it was exchanged. The same example occurs for anyone accepting crypto as payment in lieu of U.S. dollars, not to mention the tax treatment of property.
Those in the crypto community are watching for IRS guidance as well. Before the TCJA, they followed the policies IRC §1031 exchange, which involves exchanging like-kind property for other like-kind property. As a result, there are no taxes paid on the transaction. However, after the the TCJA, a 1031 is limited to real property only.
The letters from the IRS are a good start to changing the way crypto is treated as we wait for further guidance.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...