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On October 10, 2022, the Organisation for Economic Co-Operation and Development (OECD) released its new global tax reporting standards for cryptocurrency and other digital assets, the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard.[1] The CARF provides standards that, if adopted by jurisdictions, would require cryptocurrency exchanges, intermediaries, and other service providers to report to tax authorities required tax information related to certain crypto-asset transactions.

In response to the rapid use and adoption of cryptocurrency, the G-20 mandated the OECD develop a framework for the exchange of tax information for crypto-assets. According to the OECD, crypto-assets are often transferred without the use of traditional financial intermediaries and the CARF addresses coverage gaps in the Common Reporting Standard (CRS) to develop an international reporting framework to ensure standardized tax reporting for crypto-asset transactions.

The CARF includes model rules and commentary for countries to implement domestic laws to collect information related to crypto-asset transactions and is focused on four key areas: (1) the scope of crypto-assets to be covered, (2) the entities and individuals subject to reporting, (3) the transactions subject to reporting, and (4) due diligence procedures.…

Continue Reading OECD Releases New Global Tax Reporting Framework for Cryptocurrency

On June 7, 2022, Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (RFIA). This highly anticipated legislation is the first attempt at developing a comprehensive regulatory framework for cryptocurrency and digital assets.

The RFIA builds off proposals introduced this Congress and includes a number of provisions related to securities and commodities regulation. In addition, the RFIA amends the Internal Revenue Code to address and clarify issues related to the taxation and reporting of cryptocurrency and digital assets. Interestingly, the RFIA adopts one of the substantive provisions relating to digital assets in the Biden Administration’s “General Explanation of the Administration’s Fiscal Year 2023 Revenue Proposals,” known as the “Greenbook,” but not the other provision. Specifically, the RFIA adopts the provision permitting tax-free loans of digital assets, but not the provision permitting mark-to-market tax accounting for digital asset traders and dealers.

While this legislation attempts to address some of the largest outstanding questions related to the regulation and taxation of cryptocurrency and digital assets, it faces an uphill battle to be signed into law before the end of the 117th Congress. Heading into the 2022 mid-term elections, a number of Biden Administration and Democratic priorities are still awaiting action and will likely take priority this summer and fall over legislation like the RFIA. Further, this legislation will likely need to overcome the 60-vote threshold in the Senate to end a filibuster. However, the introduction of the RFIA in the Senate sets a new marker and will likely serve as a starting point in the next Congress for any legislation to regulate and tax cryptocurrency and other digital assets.

This update provides a summary of the tax provisions included in the RFIA.…

Continue Reading New Bipartisan Senate Legislation Seeks to Address Cryptocurrency and Digital Asset Tax Issues

The House Rules Committee recently released the latest version of HR 5376, the Build Back Better Act. This proposal would amend Internal Revenue Code section 1091 (“loss from wash sales of stock or securities”) to apply to a much broader range of assets, including foreign currency, commodities, and digital assets, in addition to stocks and…

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.
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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.

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Continue Reading OECD Releases Report on Tax Policy Approaches and Gaps in the Taxation of Virtual Currencies

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.…

Continue Reading IRS Releases New Cryptocurrency Guidance

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.…

Continue Reading IRS Stepping Up Cryptocurrency Enforcement Efforts

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.

Background

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