What we know about Crypto Compliance and US Federal Taxes was published by JD Supra on 9/18/18.
The last Notice issued by the IRS on Cryptocurrency was Notice 2014-21 posted on March 25, 2014 providing guidance in the form of answers to frequently asked questions. IRS has not posted any further Notices despite the fact that both the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA) have written letters (3/19/18 for the ABA and 5/30/18 for the AICPA) to the IRS to obtain further definition and clarity on the tax treatment of Cryptocurrency.
This is what IRS has posted thus far for US Federal Tax purposes:
- The use of Cryptocurrency to pay for goods or services has tax consequences that may result in a tax liability.
- Cryptocurrency is treated as “property” and the tax principles applicable to property transactions apply to transactions using cryptocurrency.
- Cryptocurrency is not treated as currency that could generate foreign currency gain or loss.
- A Taxpayer who receives Cryptocurrency as payment for goods or services must include the fair market value of the Cryptocurrency when computing gross income as of the date that the Cryptocurrency was received.
- The basis of Cryptocurrency that a Taxpayer receives as payment for goods or services is the fair market value of the Cryptocurrency as of the date of receipt.
- Cryptocurrency transactions must be reported in U.S. dollars.
- Taxpayers are required to determine the fair market value of Cryptocurrency in U.S. dollars as of the date of payment or receipt.
- When Cryptocurrency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the Cryptocurrency is determined by converting the Cryptocurrency into U.S. dollars at the exchange rate.
- Taxpayer has a taxable gain if the fair market value of property received in exchange for Cryptocurrency exceeds the Taxpayer’s adjusted basis of the Cryptocurrency.
- The Taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the Cryptocurrency.
- A Taxpayer realizes a capital gain or loss on the sale or exchange of Cryptocurrency that is a capital asset in the hands of the Taxpayer (examples of capital assets are stocks, bonds, and other investment property).
- A Taxpayer realizes an ordinary gain or loss on the sale or exchange of Cryptocurrency that is not a capital asset in the hands of the Taxpayer (examples of property that is Not a capital asset is Inventory and other property held mainly for sale to customers in a trade or business).
- Taxpayers that mine Cryptocurrency must include the fair market value of the Cryptocurrency as of the date of receipt in their gross income.
- If a taxpayer’s “mining” of Cryptocurrency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self- employment income and are subject to the self-employment tax.
- The fair market value of Cryptocurrency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.
- The fair market value of Cryptocurrency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
- A payment made using Cryptocurrency is subject to information reporting to the same extent as any other payment made in property.
- A person who in the course of a trade or business makes a payment of fixed and determinable annual and periodic income (FDAP) using Cryptocurrency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of FDAP are rent, salaries, wages, premiums, annuities, and compensation.
- A person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099- MISC.
- Payments of Cryptocurrency required to be reported on Form 1099-MISC should be reported using the fair market value of the Cryptocurrency in U.S. dollars as of the date of payment.
- The payment recipient may have income even if the recipient does not receive a Form 1099-MISC.
- Payments made using Cryptocurrency are subject to backup withholding to the same extent as other payments made in property. Payors making reportable payments using Cryptocurrency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required.
- A third party that contracts with merchants to settle payments between the merchants and their customers is a third-party settlement organization (TPSO).
- A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and third-party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When determining whether the transactions are reportable, the value of the Cryptocurrency is the fair market value of the Cryptocurrency in U.S. dollars on the date of payment.
- Taxpayers may be subject to penalties for failure to comply with tax laws.
- Tax underpayments attributable to Cryptocurrency transactions may be subject to penalties, such as accuracy-related penalties under section 6662.
- Failure to timely or correctly report Cryptocurrency transactions when required to do so may be subject to information reporting penalties under Internal Revenue Code Section 6721 and 6722.
Don’t be a Victim of your Own Making
Although there might be some penalty relief available to Taxpayers required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause, Taxpayers should not take the risk. Taxpayers that hold Cryptocurrency ought to consult their specialized tax representative for the best possible outcome related to their Cryptocurrency U.S. Federal Tax obligations.