Cryptocurrency taxation is continuing to remain a trending topic within the crypto, blockchain and fintech world. The U.S-based, IRS, is responsible for outlining and clarifying their outlook on cryptocurrencies from a tax perspective. But only recently have they unleashed much-needed clarity for accounting and tax professionals seeking formal guidance….or have they?
A recent announcement from the IRS claims that not all of their guidance has been ratified and many of their online, digital memos and FAQs are being updated regularly, without any warning or notice. In 2019, when the IRS issued its guidelines on taxing digital assets, the world interpreted this as official legal guidance. The IRS states that while it is a current view of how to handle certain tax scenarios, it is by no means considered “tax advice”. This has inadvertently led to greater confusion over determining what is official tax guidance and what is not.
Do all of the IRS announcements, FAQs and press releases equate to the legitimate legal framework? Or does it merely represent the stance of the U.S tax authorities? In 2020, that is the question professionals are seeking answers to.
Crypto Reporting Is Changing
Ultimately, this leaves large gaps of unknowns for businesses and professionals and how they will interpret guidance passed down from the IRS. With so many accounting and tax professionals interpreting “guidance” according to their own methodology, the bubble of confusion continues to inflate, but when will it pop? Perhaps after 2019 and 2020 tax seasons come to a close, and the IRS begins to review the responses of crypto tax reporting, will they better understand how to issue guidance and improve information reporting.
In the U.S, it is the responsibility of crypto exchanges to voluntarily fill out tax forms 1099-K and 1099-MISC for their customer base. This comprises a large bulk of taxable transactions occurring in the U.S crypto community, but it does not take into account the ongoing activity outside of these exchanges, which is another large portion of cryptocurrency activity that goes unaccounted for.
Difficulties With Reporting
As it stands, professionals and investors alike are uncertain on which tax forms need to be filled out and how. The recent introduction of having to disclose digital assets on said forms has raised the discussion of honesty and transparency. When the IRS began sending letters to crypto holders, the community had a mild panic and many investors rushed to calculate the basis and submit their crypto holdings. This is a result of exceptionally low reporting numbers from previous years, forcing institutions to find smarter ways to collect the permanent tax information they need.
However, there are still a large segment of the crypto community that have neglected to disclose their entire crypto asset portfolio, or may not even be aware of their potential tax obligations. The coming months and years will see many things change and no room for negligence. Should the crypto community embrace regulation and reporting for digital assets, the industry would likely enjoy many of the benefits. Yet, many ambassadors and crypto enthusiasts agree that government intervention goes against the core values of independence from governments, total privacy and control by the users of crypto. Regulation could potentially break free from these core pillars.
Taxable Events Will Evolve
There was a dramatic buzz in the last few months of 2019, when the first signs of legal clarity began to shine beyond the dark clouds of uncertainty for crypto tax. It was the first time there was a sense of understanding and progress for taxability on cryptocurrencies. When Blox discussed the IRS update on crypto tax, we highlighted some of the first foundations of the legal framework. While the announcement created controversy and confusion, it was a step in the right direction.
Airdrops, crypto conversions, transfers, trades and practically all types of crypto activities are undergoing their own set of classifications for taxability, and the IRS has made it clear that things can change without any warning. But, their recent announcement mentions a program that will help to clarify reporting requirements to ensure forms are more accurately filled. By the end of 2020, the IRS will undoubtedly collect immense amounts of data that will help dictate how they implement crypto reporting for the proceeding tax seasons.
Can Cryptocurrency Acts Help?
Around the start of the new year, two fresh new acts went viral online within the cryptocurrency and accounting communities. The first act, The Cryptocurrency Act of 2020, is poised to be the first foundation of legal framework for cryptocurrencies and digital assets. The new bill has been put forth with the goal of determining which federal agencies are responsible for crypto regulation. It will also initiate rules that require all digital currency transactions, individuals and businesses to be tracked and monitored, similar to other traditional currency activities.
The second act that sparked excitement for consumers and B2C businesses, is the announcement of the Virtual Currency Tax Fairness Act. The new VCTFA seeks to create a new tax exemption on the use of crypto and virtual assets for personal use, as long as it is under a specified threshold – an exciting prospect for businesses.
The Crypto Act of 2020 is far from implementation stage, but there are promising elements to look forward to. Today, accounting and tax professionals rely on these acts to help gauge the direction and temperature of the IRS.
So, what exactly does this mean? This would render the current taxability of crypto purchases moot and in lieu would allow smaller crypto purchases without creating a taxable event for the holder. Until now, almost every transaction with virtual currencies was deemed taxable, making it difficult to implement crypto as a legitimate day-to-day currency with real buying power. No one will continue with crypto purchases if it comes attached to an expensive tax. Accounting and tax professionals may know all of this as de minimis.
Where Is the Destination for Crypto Tax Regulation?
There is definitely a mixture of excitement and confusion over the future of cryptocurrencies. The potential for crypto and digital assets to change our world is imminent, but that comes with one major stipulation. The arrival of legalized regulation that is straightforward and binding. Until now, there are growing debates on the interpretation of these tidbits of guidance for crypto accounting and tax scenarios.
The next few months, expect to see either more confusion or increased clarity. The moment society and professionals can start to fathom how to accurately engage with their digital assets, will be the moment crypto transforms into something new, bigger and more utilitous than it ever was before.