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Good recordkeeping can avoid cryptocurrency tax headaches

| Aug 19, 2019 | Bitcoin, Cryptocurrency

Bitcoin and other virtual currencies continue to make headlines as they are used more and more frequently. Although it remains a favorite currency for illegal sales of drugs and weapons, and for other other “shadowy” transactions accomplished on the dark web, they have became a legitimate method of payment in many above-board transactions, not to mention an investment vehicle. It is, thus, unsurprising that the government has been paying close attention to the ramifications.

Back in 2014, the IRS issued Notice 2014-21 to clarify the treatment of cryptocurrency for federal tax purposes. Note, it is generally treated as property and can be subject to capital gains/losses, but it may also be reportable income if it is received as payment for goods and services. Both before and since, the IRS and other governmental agencies have been focused on the regulation – and the taxability – of cryptocurrency and related transaction.

For it’s part, the IRS has started more than 30 campaigns since 2017 that are intended to educate the public and to ensure compliance. Among compliance efforts, in 2016 the Internal Revenue Service subpoenaed Coinbase, one of the largest exchanges for Bitcoin and Ethereum cryptocurrencies, for the identities, account information and transaction histories for all users. After a court battle and Congressional involvement, the broad subpoena was limited in scope to a small sliver of time and to transactions of $20,000 or more. The identities of average users were spared for the time being, but the message was clear. The IRS is watching these transactions and cryptocurrency users had better comply with the tax laws.

Most recently, the IRS has begun sending letters to thousands of cryptocurrency users it’s identified, reminding them of their obligation to properly report – and pay – taxes on their cryptocurrency holdings and transactions. By the end of this month, more than 10,000 users are expected to receive such letters. While different situations will prompt different versions of the letter – there are purported to be three in total – all are focused on education about filing and tax obligations, as well as where to go to find more information.

Per IRS Commissioner Chuck Rettig, “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.” Commissioner Rettig went on to state that the IRS “is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

At the same time, Blox, a platform for crypto accounting, management and tracking, just released one of the first and most in-depth reports on the state of crypto accounting. Among its findings are that on a small number – perhaps as low as 5% – of certified public accountants believe their individual and business clients are able to accurately track and report their virtual assets and transactions for purposes of proper accounting and taxing. Reasons for improper reporting were chalked up to a lack of understanding of crypto tax rules, and a need for more government regulation and guidance to help clients remain in compliance.

All of this leaves a burgeoning business for crypto accountants, as cryptocurrency users try to stay above the law. For users, the first step is going to be good recordkeeping.

This article originally appeared as a column for the Cleveland Jewish News.