It is tax season in the United States as this is written (the tax filing date for federal taxes 2020 has been moved from its typical date of April 15 to May 17, 2021) and, for the first time this year, the very first question on the standard 1040 form is whether “at any time in 2020 have you received, sold, sent, traded or otherwise acquired a financial interest in a virtual currency”.
In other words, it’s the very first piece of information the IRS wants to know, right after a person’s name and address. The subtlety of the placement of this question is not lost on anyone. The IRS obviously believes that there is significant underreporting (and underpayment) of tax obligations related to cryptocurrency transactions and seeks to increase the revenue stream for the government from those transactions.
In 2019, the question on cryptocurrency was listed in Annex 1 of the tax form. This calendar is used to report certain adjustments or additional income; thus, many registrants do not use it. The prominent location on the 2020 1040 form means that the 150 million people who use this form will have to answer the question. Additionally, while the question itself does not change the obligation to pay taxes on cryptocurrency transactions, there is a difference for a reporter between ignoring this obligation on the one hand and answering a question. deceptively on the other hand. The existence of the question will likely force tax preparers to positively ask the question of their clients. And, an incorrect answer could be used against the filer by the IRS.
How does the US government treat cryptocurrency? The answer depends on the government agency we are talking about. For the Securities and Exchange Commission, cryptocurrency can be security. The SEC has filed numerous lawsuits (civil and criminal) against parties who sold cryptocurrency tokens without filing a registration statement for the offering and without the offering meeting a registration exemption.. The position of the SEC is that offers for such tokens qualify as securities under the Howey test.
For the Commodity Futures Trading Commission, cryptocurrencies are commodities. On September 17, 2015, the CFTC filed its first cryptocurrency action against an unregistered Bitcoin trading platform. The CFTC has tasked Coinflip Inc. and its CEO to operate a commodity options trading or processing facility (offering to connect buyers and sellers of Bitcoin options contracts) without complying with Commodity Exchange Act or CFTC regulations otherwise applicable to swaps. The most important part of the CFTC order was the following unambiguous statement regarding cryptocurrencies: “Bitcoin and other virtual currencies are included in the definition and properly defined as commodities.“
But there is even more confusion in the alphabet soup of US government agencies. The Financial Crimes Enforcement Network (FinCEN) is an office of the US Department of the Treasury that, among other things, collects and analyzes information on financial transactions in order to combat money laundering, terrorist financing and other financial crimes. national and international. As early as 2013, he considered virtual currencies to be money. Finally, the Office of Government Ethics of the United States considers that virtual currency is classified as “property held … for investment or income generation” under the Government Ethics Act, which means executive employees are required to report their virtual currency holdings in their public or confidential financial disclosure report, subject to applicable reporting thresholds for assets held for investment or production purposes. income.
For the purposes of this article, it is of course the position of the IRS that is relevant. The IRS’s focus on cryptocurrency is relevant both to taxpayers who buy and sell cryptocurrency, as well as to businesses or individuals who deal with those taxpayers. Taxpayers should be familiar with the IRS ‘positions on the tax treatment of cryptocurrency transactions. Third parties may be faced with IRS requests for information about taxpayers and their cryptocurrency transactions. In certain circumstances, third party registrars may be subject to financial or regulatory obligations, such as the obligation to keep records or report transactions.
Taxpayers should be aware that the IRS first introduced its guidance on the tax treatment of virtual currencies in 2014, in IRS Notice 2014-21. The IRS has said that, for federal tax purposes, virtual currency is treated as property – not money – and that general tax principles applicable to real estate transactions apply to transactions using the currency. Virtual. Thus, a taxpayer who receives virtual currency as payment for goods or services must, in calculating gross income, include the fair market value of the virtual currency, measured in US dollars, as of the date the virtual currency was brought down. been received. Additionally, if virtual currency is used to pay for an item or otherwise exchanged for property, the taxpayer has a taxable gain if the fair market value of the property received in exchange for virtual currency exceeds the taxpayer’s adjusted base for virtual currency.
Notice 2014-21 further provides that (1) virtual currency received by an independent contractor for the provision of services constitutes self-employment income, (2) a payment made using virtual currency is subject to the communication of information to the same extent as any other payment made in the property, and (3) payments made using virtual currency are subject to backup withholding to the same extent as other payments made in the property. In other words, there are many ways that taxpayers can break cryptocurrency tax laws and the IRS has made the issue more prominent by putting the cryptocurrency question at the top of Form 1040. .
But the taxpayers and third parties should know that this is just one of the steps the IRS is taking to strengthen its enforcement efforts. The IRS called an initiative “Operation Hidden Treasure.” which, as first reported by Forbes, was announced during a March 5, 2021 Federal Bar Association presentation on Fraud Enforcement Priorities by Damon Rowe, Director of the IRS Enforcement Bureau. As Forbes reported, Operation Hidden Treasure is made up of agents trained in cryptocurrency and virtual currency tracking, and who focus on taxpayers who omit cryptocurrency income from their tax returns. It is a partnership between the Civilian Anti-Fraud Office and the Criminal Investigation Unit and aims to eradicate tax evasion by cryptocurrency owners.
In Part 2 of this article, we’ll look at other IRS enforcement efforts, as well as reporting and withholding obligations that might arise based on past IRS enforcement activities.
This column does not necessarily reflect the opinion of the Office of National Affairs, Inc. or its owners.
David Zaslowsky is a litigation partner in the New York office of Baker McKenzie and editor of the company’s blockchain blog. Scot Frewing is a partner in the tax practice in the Palo Alto office of Baker McKenzie. They can be contacted at david.[email protected] and [email protected] , respectively.
Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].