Virtual Currency Update – Some Answers With Many More Questions
The income tax treatment of virtual currency (also known as cryptocurrency) transactions continues to evolve. There remains a great deal of uncertainty in the treatment, computations, and reporting of virtual currency transactions, despite the recent activity and guidance from the IRS.
The IRS issued thousands of notices to taxpayers in the summer of 2019 regarding possible reporting obligations associated with virtual currency transactions from 2013 to 2017. Subsequently the IRS issued Revenue Ruling 2019-24 on Oct. 9, 2019. The new revenue ruling is discussed in more detail below, but it is very limited in scope leaving many unanswered questions.
In addition, the IRS added the following question at the top Schedule 1 of the 2019 Form 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This is a very broad question and the terms are not well defined as they relate to virtual currency transactions. Thus, taxpayers that engage in any form of virtual currency transaction during the year likely must answer this question “Yes”.
Recap of Notice 2014-21
This was the original (and only) guidance on virtual currency available until Revenue Ruling 2019-24. Essentially, it told taxpayers that virtual currency should be treated as property and not currency. Additionally, a taxpayer who receives virtual currency as payment (whether for goods or services) must include in gross income the fair market value of the virtual currency as of the date of the receipt (and subject to self-employment tax if received for services) with a basis in the virtual currency as the fair market value as of the date of the receipt. Additionally, the character of any gain resulting from a virtual currency transaction depends on the treatment of the virtual currency in the hands of taxpayer (as either capital or ordinary). Finally, one of the more notable pieces of that Notice gave guidance around issuing a Form 1099 when there is a payment of $600 or more. You can see an additional discussion around that Notice and more from our previous blog post about the tax implications to investing in cryptocurrencies.
Recap of Revenue Ruling 2019-24
There was no new official guidance (although there were a lot of requests for guidance) between Notice 2014-21 and Revenue Ruling 2019-24. Revenue Ruling 2019-24 essentially provides the following:
- If a taxpayer receives a new asset of cryptocurrency in a transaction involving a hard fork (essentially a stock split), the taxpayer would have ordinary income in the year of receipt. The income is recognized when the owner has the ability to dispose of cryptocurrency.
- If cryptocurrencies are not specifically identified, they should be deemed to have been sold, exchanged, or otherwise been disposed of on a first-in-first-out basis.
Lots of Remaining Questions
There are significant questions remaining regarding the treatment of virtual currency. The IRS has determined that virtual currency is property, however the courts have called virtual currency a security and the AICPA claims that virtual currency is an intangible asset. There is no provision in the Internal Revenue Code which has specifically addressed virtual currency and there is little to no guidance as to how to calculate the value in order to consistently apply methodology for calculating gains and losses.
How to Report and Move Forward
The recordkeeping around virtual currency transactions is a key area of focus. It is critical that taxpayers track their transactions and the value and basis of their transactions. It is becoming a key focus of the IRS, despite the lack of guidance. However, we need to navigate through this environment cautiously and carefully.
The IRS has issued a Frequently Asked Questions page related to virtual currency. While these answers are not legally binding, they do provide insight into the IRS’s approach to these matters as well as what their position might be if an audit is initiated on a taxpayer that deals in virtual currency.
Cryptocurrency is an exciting and interesting new world which taxpayers and the IRS are still figuring out how to navigate. Given the lack of guidance and uncertainty from the IRS, it is essential that taxpayers understand the risk of acquiring virtual currency and the importance of recordkeeping and reporting. Reach out to your KSM advisor if you have any questions or concerns, or complete this form.
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