In July, more than 10,000 cryptocurrency investors received warning from the IRS that they may owe taxes on improperly reported income. Weeks later, another round of letters were sent to some, outlining the amount of taxes owed for cryptocurrency gains and demands for payment. These letters are likely the tip of the iceberg in a long-anticipated IRS crackdown on crypto income—the latest in a series of government activity in this arena.
Past efforts included attempts to pressure the largest U.S.-based crypto exchange into divulging account information for more than 13,000 customers who bought bitcoin from 2013 to 2015. While the exchange initially resisted demands for information, it was court ordered to comply in early 2018, leaving many investors in a waiting game, wondering if and when they would be asked to pay delinquent taxes.
These events are naturally creating a lot of buzz in the community, and bringing rise to many questions about how cryptocurrency investing fits into existing tax and trading laws. The market price for popular cryptocurrencies like bitcoin plummeted immediately following the first wave of letters. But more notable is the fact that these letters are doing little to solve the substantial ambiguity in cryptocurrency governance. The recent IRS letters referenced outdated guidance from 2014, despite the fact that in April, a bipartisan group of 21 members of the House of Representatives wrote to the IRS asking for specific guidance on how taxpayers are to deal with transactions involving cryptocurrencies.
While guidance may remain unclear for some time, the intentions are obvious. In a recent statement, IRS commissioner Chuck Rettig said, "Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics."
Similar enforcement is taking shape in other jurisdictions. Last month in the UK, Her Majesty’s Revenue and Customs sent letters to several cryptocurrency exchanges requesting lists of users/customer names and transactions to help the agency identify incidences of tax evasion.
In light of current crackdowns, and additional cryptocurrency governance that may be on the horizon, corporations and individuals participating in crypto investing must be aware of the range of risks. This includes the issue of anonymity. While many view the ability to trade anonymously as one of cryptocurrency’s key value propositions, its use and ownership is often traceable. Anonymity is simply no longer effective as a means to skirt taxes or reporting on cryptocurrency gains.
Cryptocurrency is inherently volatile and continually changing, and will likely continue to be for some time. Investors must watch the markets closely and advocate for clarity from governments regarding cryptocurrency tax, trading and other regulations. Without guidance, investors will continue to face challenges in avoiding unexpected taxes, penalties and inadvertent non-compliance.