On Nov. 13, 2018, IRS Commissioner Charles Rettig stated that the IRS is focused on enforcing tax compliance for holders of virtual currency. Speaking at an American Institute of Certified Public Accountants (AICPA) event, Rettig stated, “Crypto is no longer cash. It is information data currency that the IRS has and will have more information about than you could ever imagine.” Notably, Rettig’s statement hints at the massive crypto currency related data gathering the IRS and other U.S. government agencies have undertaken over the last few years. The IRS and other government agencies have been working with Chainalysis, a blockchain analytics company, to slowly gather and analyze Bitcoin and Ether trading data since 2015. Additionally, in 2017, the IRS successfully subpoenaed Coinbase, a major U.S. cryptocurrency exchange, and obtained data on roughly 14,000 accounts that traded, sent or received Bitcoin in excess of $20,000 between 2013 and 2015.
As the IRS steps up enforcement for individual and institutional investors of virtual currencies, taxpayers are left with little guidance on how to properly comply with US tax law. IRS Notice 2014-21 remains the only virtual currency tax guidance issued by the IRS. It states that virtual currencies are considered property rather than currency for tax purposes. Over the past year, the AICPA, the American Bar Association, and the House Ways and Means Committee have all asked the IRS to issue additional guidance or offer safe harbor exemptions. While the IRS has issued no new guidance, it has issued some noteworthy statements. In July, the IRS stated that virtual currencies would be an area of focus for IRS audits going forward. Additionally, in September, the IRS stated that taxpayers reporting crypto currency losses for the 2018 tax year are more likely to be selected for an audit of prior tax years. Perhaps recognizing that the lack of guidance would lead to an increase in taxpayer questions, Commissioner Rettig concluded his remarks with a pledge to improve the agency’s customer service and technology systems in order to handle taxpayer questions and increased enforcement in cases of non-compliance.
Taxpayers with crypto or virtual currency exposure should consult with their advisors to determine their virtual currency tax obligations and other filing requirements. While the filing deadline for the 2018 tax year is a several months away, taxpayers would be prudent to seek the advice of their tax preparer before the end of the year in order to consider potential tax planning opportunities and to preserve the necessary data to support basis calculations.
