We Urge The IRS to Provide Better Guidance on Cryptocurrency Rules
Following an explosive 2017, many of the cryptocurrencies we are commonly familiar with reached their all-time peak values in January of 2018 before the market took a spectacular turn for worse and began a correction that lasted for the entire year. During the year, many cryptocurrencies you are familiar with witnessed staggering losses. Bitcoin alone lost more than $250 billion, or 80% of its value, Ethereum lost more than 90% of its value, and other cryptocurrencies suffered similar losses. 1
It was practically impossible to read the news without seeing reports on how poorly the market was doing, or how much money investors were losing by the minute. Because of this, 2018 will forever be known as the year the crypto markets took a beating but lived to tell the story.
On April 11, 2019, several members of the U.S. House of Representatives wrote Internal Revenue Service Commissioner Charles Retig to urge the IRS’s need for better guidance on the tax consequences and basic reporting requirements for taxpayers that use virtual currencies including rules relating to virtual assets and reporting
Like a phoenix rising from the ashes and led by Bitcoin, cryptocurrency values have strongly rallied in 2019 and are more widely held than ever, with a recent Harris Poll finding that 11% of American’s owns some amount of Bitcoin.
In order for virtual currencies to become more mainstream, millions of people that are currently on the sidelines need to be provided assurance and clarity that Cryptocurrencies are safe and the rules around taxation are clear and fair.
This is why a recent letter issued on April 11, 2019, from several members of the U.S. House of Representatives to the Commissioner of the Internal Revenue Service (IRS) is very important. In the letter, the Congressional representatives urge the IRS to update its most recent 2014 guidance from Notice 2014-21, in which the IRS indicated that cryptocurrencies are considered to be property.
Specifically, the members of Congress call for guidance to address several areas of current ambiguity, including:
- Specific acceptable methods for calculating the cost basis of virtual currencies.
- Acceptable methods of cost basis assignment and lot relief for virtual currencies, including specific identification, first-in-first-out, or average cost basis.
- The tax treatment of hard-forks, such as the hard-forks of the Bitcoin blockchain.
The letter goes on to state that it is unreasonable to expect taxpayers to answer these complex questions while the IRS remains silent. The letter concludes by requesting written guidance on what and when IRS guidance will be provided.
We agree with this and hope that the IRS engages timely to provide the requested guidance on these and other issues regarding the taxation of virtual currencies. This will serve to encourage millions of taxpayers currently waiting on the sidelines to participate in the markets, leading to more robust and diversified investment pools, resulting in stronger and more stable cryptocurrency markets.
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Joseph McCaffrey a Partner of Morris + D’Angelo, a multi-office, boutique tax, accountancy, and advisory firm heads the San Francisco office. Joseph has over 30 years of experience that enable him to distill complex, ever-changing, real-life challenges into effective “Meaningful” solutions while balancing your business, personal and family goals that draw upon a large network of contacts to help you, wherever you may be.