New IRS Tax Guidance Targets Crypto, and US Persons Who Use It

Taxation in the U.S. is unbelievably complex, but the new IRS guidance takes a step-by-step approach to address some of the most common issues facing holders of digital currency.

The basics are as follows: If you hold digital currency and you sell or exchange it, you are subject to U.S. tax.

If you receive digital currency as a result of a gift, there is no immediate tax.

In July 2019, the IRS announced through a news release that it had begun sending "Educational" letters to taxpayers with digital currency transactions that have either potentially failed to report income or did not accurately report their transactions.

Letters 6174 and 6174-A inform the taxpayer that the IRS has "Information that you have or had one or more accounts containing virtual currency." Though neither of the two letters requires a direct response from the taxpayer, Letter 6174-A expressly warns the taxpayer that the IRS may pursue further enforcement activity in the future.

Although the IRS stated in its announcement that "All three versions of the letters strive to help taxpayers understand their tax and filing obligations and how to correct past errors," Letter 6173 seems to presume that the taxpayer in question already understands the digital currency reporting requirements and has chosen not to comply with them.

While it is widely speculated that the IRS identified the initial group of more than 10,000 taxpayers to receive compliance letters using the data provided by the Coinbase subpoena, any taxpayer with dealings in digital currency should anticipate increased IRS scrutiny.

Revised draft Form 1040.Following the issuance of the October Revenue Ruling and FAQs, the IRS also released a draft Form 1040, Schedule 1 - which, if adopted, will require taxpayers to answer whether at any time during the year the taxpayer sold, sent, exchanged or otherwise acquired any financial interest in digital currency.

Methods of coming into complianceIn light of increased enforcement and compliance efforts on the part of the IRS, it is especially important for taxpayers who have held digital currency in the years preceding 2019 to seek advice from a competent tax professional to determine if there have been any taxable transactions associated with the acquisition or disposition of digital currencies.

The bottom line is this: If you have held digital currency at any time, you should contact a qualified tax professional to assist you in evaluating your tax situation.