IRS issues new guidance on taxation of cryptocurrencies

The Internal Revenue Service issued new guidance on Oct. 9, 2019, regarding the taxation of virtual currencies, commonly called “cryptocurrencies.” This is part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the IRS stated. The guidance expand on the agency’s first set of guidelines on virtual currencies, Notice 2041-21, issued in 2014.

“The new guidance maintains that virtual currencies are ‘property’ for tax purposes and does not address other types of crypto assets,” said Nicholas Mowbray, an attorney at BakerHostetler and member of the firm’s Blockchain Technologies and Digital Currencies team. “If you read the guidance carefully though, it defines a virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the U.S. dollar or a foreign currency. There is a legitimate question regarding whether other types of tokens fall into this definition of virtual currency.”

A tool for self-reporting

Similar to the 2014 guidance, the new guidance includes the ruling itself, Revenue Ruling 2019-24, and a list of frequently asked questions. It offers taxpayers practical guidance on how to value virtual currencies and what happens when a taxpayer owns multiple units of a virtual currency and sells off some, but not all, of their units, Mowbray noted.

“If you combine this with the statements and positions the IRS is taking on enforcement, it is clear that the IRS is trying to give taxpayers practical guidance despite there being a major concern that the lack of reporting is not because guidance is lacking, but instead because taxpayers are simply not reporting. The hope is likely that the two will lead to increased self-reporting by taxpayers,” he added.

Capital assets only

Mowbray also pointed out that the IRS stated the new guidance applies only to virtual currencies held as capital assets. “As this asset class develops and exchanges and markets for it expand, the IRS is eventually going to have to weigh in on how gains and losses should be treated where: 1) a taxpayer actively trades the virtual currency; or 2) the virtual currency is held as inventory or for sale to customers,” Mowbray said.

The IRS stated it is “aware that some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax or did not report their transactions properly. The IRS is actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.”

The agency is soliciting public input on additional guidance in this area. The principal author of this revenue ruling is Suzanne R. Sinno of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information, contact her at 202-317-4718 (not a toll-free number).

For further insights from members of BakerHostetler’s Blockchain Technologies and Digital Currencies Team, including discussion of specific situations affected by the guidance, please visit www.theblockchainmonitor.com/2019/10/alert-irs-issues-new-guidance-and-faqs-on-virtual-currencies/.

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