What Taxpayers Should Know About the IRS’s Cryptocurrency Tax Guidance

For many years, the only guidance published by the IRS regarding the taxation of cryptocurrency was simply to tax it as property. This left many questions for US taxpayers with cryptocurrency and no direction regarding how to properly account for it from a tax perspective. As a result, many taxpayers didn’t report cryptocurrency investments on their tax returns.

Renewed interest in regulating the taxation of cryptocurrency emerged with a new IRS commissioner in place as of 2019.

Starting in July of 2019, the IRS sent warning letters to thousands of US taxpayers instructing them to provide more detail on their cryptocurrency investments or risk IRS examination. More investors should anticipate receiving similar correspondence as the IRS continues to gain access to records from cryptocurrency exchanges.

Shortly after the issuance of these notices, the IRS released its first guidance in over five years in the form of Revenue Ruling 2019-24 and FAQs. Additionally, the IRS revised Schedule 1 of Form 1040 to ask taxpayers if they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.

For an in-depth review of the new guidance, read our article. Below are the top takeaways from the recently issued guidance.

Expect increased scrutiny

The updated schedule is meant to enforce voluntary compliance and gather more information regarding cryptocurrency. It also signals inaccurate reporting could lead to penalties, interest, audits, and even criminal prosecution.

The IRS has subpoenaed cryptocurrency exchanges to access investor information. In addition, the IRS is increasing its use of data analytics to identify users, and it’s partnering with other governmental bodies to share this information. Cryptocurrency transactions are now a prime focus of IRS scrutiny.

There are several methods to become compliant

Any taxpayer who hasn’t properly reported cryptocurrency transactions to the IRS may have several options to become compliant, including filing amended tax returns or voluntary disclosure through the IRS’s Streamlined Filing Compliance Procedures or to the IRS Criminal Investigation Division.

During a January 2020 conference at the Practicing Law Institute, Pamela Lew, senior counsel for the IRS Office of Associate Chief Counsel, indicated the IRS is willing to explore the use of Private Letter Rulings to address cryptocurrency questions. The purpose of a Private Letter Ruling is to advise the taxpayer about the tax treatment they can expect from the IRS in the circumstances specified by the ruling and explain the rationale for that decision.

It can also help a taxpayer confirm whether or not a potential action will result in a tax violation. Also, the taxpayer can request a conference during the submittal process in order to fully develop the facts.

When seeking a Private Letter Ruling involving a complex issue, the taxpayer should hire a competent tax professional and be diligent in following the submission requirements set forth in the revenue procedure.

We’re Here to Help

Choosing to improperly track, or not report, cryptocurrency transactions may expose taxpayers to IRS examination and potential penalties.

If you received correspondence from the IRS or have questions regarding your cryptocurrency investment, contact your Moss Adams professional or visit our dedicated tax controversy page.