On May 20, 2021, the U.S. Department of the Treasury (“Treasury”) released the American Families Plan Tax Compliance Agenda, a report detailing the Biden administration’s proposed measures to raise $700 billion in additional tax revenue over the next decade through the Internal Revenue Service (“IRS”) and its enforcement-related efforts (the “Report”). Additional detail about these
As 2020 finally comes to a close, it is time to consider year-end tax planning. One bright spot this year has been the performance of cryptocurrencies. Bitcoin, in particular, is trading at or near all time highs, considerably above its previous peak at the end of 2017. Other cryptocurrencies, like Ether, have also had considerable returns this year. Taxpayers holding significantly appreciated cryptocurrency may be considering the best way to optimize their charitable giving. Below we describe the tax benefits of making donations of appreciated cryptocurrency, as well as other tax considerations for both donors and charities.
Continue Reading Charitable Contributions of Cryptocurrency: Tax Benefits and Other Considerations for Donors and Charities
The OECD released a report titled Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues on October 12. The report, which was prepared and endorsed by the 137 members of the OECD’s Inclusive Framework on Base Erosion and Profits Shifting, provides a comprehensive analysis of the approaches and policy gaps across the main types of taxes (i.e., income, consumption, and property taxes).
The report addresses the following areas, across more than 50 jurisdictions (based on responses to questionnaires supplemented with publicly available materials):
- The characterization and legality of virtual currencies;
- The income tax consequences across the different stages of a virtual currency’s lifecycle, from creation to disposal;
- The consumption and property tax treatment of virtual currencies;
- Common tax policy challenges and emerging issues; and
- Considerations for policymakers.
The IRS has released new guidance on the U.S. tax treatment of cryptocurrency for the first time since 2014. The guidance includes Revenue Ruling 2019-24, which provides guidance on the tax treatment of hard forks. The IRS also released a series of FAQs covering a variety of topics that expand on Notice 2014-21.
Revenue Ruling 2019-24
Revenue Ruling 2019-24 generally concludes on two scenarios involving hard forks. A hard fork occurs when a blockchain undergoes a protocol change resulting in a permanent diversion from the legacy or existing blockchain, which may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. In the first scenario, the cryptocurrency blockchain experiences a hard fork but the taxpayer does not receive units of a new cryptocurrency, and in the second scenario, the taxpayer receives units of new cryptocurrency “as a result of an airdrop of a new cryptocurrency following the hard fork.” The Revenue Ruling concludes that the taxpayer does not have income in the first scenario. However, in the second scenario, the taxpayer has ordinary income because he has experienced an accession to wealth. The income arises at the time of the airdrop because the taxpayer is, at that time, able to exercise dominion and control over the forked cryptocurrency.
The IRS has confirmed that it has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. In the announcement, IRS Commissioner Chuck Rettig says 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.”
The IRS identified the taxpayers receiving these letters through various ongoing IRS compliance efforts, likely including customer information that the IRS received last year after successfully enforcing a John Doe summons against Coinbase. The IRS has said that it expects more than 10,000 taxpayers will receive these letters by the end of August.
Bipartisan members of the House are advocating for more clarity in the tax law as it relates to taxation of cryptocurrency.
First, on April 9, Representative Warren Davidson (R-OH), a member of the House Financial Services Committee, reintroduced legislation that would provide clarity on certain tax and securities law issues related to cryptocurrency. The bill, entitled the “Token Taxonomy Act of 2019,” resembles the original bill that Davidson introduced in the 115th Congress with Congressional Blockchain Caucus co-chair Darren Soto (D-FL). The 2019 version of the bill is co-sponsored by Representatives Soto, Josh Gottheimer (D-NJ), Ted Budd (R-NC), Scott Perry (R-PA), and Tulsi Gabbard (D-HI) (who has announced she is running for President).
Davidson said in a statement that “[t]he Token Taxonomy Act is the key to unlocking blockchain technology in America. Without it, the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia.”
The bill would enact a number of new tax provisions. …
Continue Reading Congress Weighs In on Cryptocurrency Taxation
The Internal Revenue Service (IRS) made a pair of announcements on July 2 that it is increasing its focus on taxpayers who avoid their tax obligations using cryptocurrency.
By way of background, in April 2014, the IRS issued Notice 2014-21, which generally provided that “convertible virtual currency” is treated as property, not currency, for tax purposes and explained, in question and answer format, the application of existing general tax principles to transactions using convertible virtual currency. The Notice defines virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” It further provides that convertible virtual currency is “[v]irtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency,” citing bitcoin as one example of a convertible virtual currency.
The Notice describes some of the tax consequences of receiving or exchanging virtual currency for property or services. If a taxpayer receives virtual currency in payment for goods or services, he or she has taxable income equal to the fair market value of the virtual currency. If the taxpayer uses virtual currency to acquire goods or services, and the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, then the taxpayer has taxable gain.
The IRS became concerned that taxpayers were not reporting cryptocurrency transactions, and in November 2016, sought a court order to serve a John Doe summons on Coinbase, one of the world’s largest digital asset exchange companies. The summons sought broad information on all US customers conducting transactions in cryptocurrency from 2013-2015. Although the court ultimately narrowed the scope of information that the summons could request, it did order Coinbase to comply with the summons. Click here to read Steptoe’s blog post about the Coinbase summons.
New IRS Announcements
On July 2, the IRS Large Business and International division (LB&I) announced a new audit campaign to address tax noncompliance related to the use of virtual currency. LB&I campaigns direct the IRS’s audit resources to specific areas the IRS believes have the greatest risk of noncompliance. Virtual currency is one of 40 campaigns that have been announced by the IRS since January 2017. The IRS’s announcement means that taxpayers who failed to report virtual currency transactions face an increased risk for audit.…
Continue Reading IRS Turning up the Heat on Cryptocurrency Transactions
On May 21st, Alan Cohn hosted the 217th episode of The Cyberlaw Podcast. We took a deep dive into all things blockchain and cryptocurrency discussing recent regulatory developments and the current state of play of the industry. Jack Hayes discusses the status of regulation surrounding cryptocurrencies including anti-money laundering and sanctions compliance, the Department of…
After a year-long fight with the IRS on turning over customer data, Coinbase both won and lost. It won in that the court significantly narrowed the type of information that it was ordered to turn over to the IRS. It lost in that it was still required to turn over data on approximately 13,000 customers. For the 13,000 customers this means that the IRS may now be contacting you to let you know that you may owe additional tax.…
Continue Reading Information on 13,000 Coinbase Customers Turned Over to IRS – Was Your Information Among Them?
On March 1, Steptoe is hosting a workshop in New York on the tax consequences of investing in cryptocurrency, as well as common methods of tax structuring for individuals and entities using, trading, and investing in cryptocurrency and tokens. The workshop will feature discussions on a range of topics from determining basis, income, and capital…