Chamber to IRS: Tax Payers Need Guidance on Crypto Tax Rules
May 17, 2021
Over the past five years, the Internal Revenue Service (IRS) has significantly increased enforcement actions against taxpayers who transact in digital assets. But, while ratcheting up its enforcement, the IRS has not provided meaningful guidance on how to comply with tax rules since 2014.
“This disparity creates risk for taxpayers seeking to comply with the laws, wastes IRS audit resources, dampens commercial activity and economic recovery, and stifles U.S. innovation,” according to Amy Davine Kim, Chief Policy Officer at the Chamber of Digital Commerce.
This week, the Chamber published a policy position that identifies key areas where the agency must issue more guidance for taxpayers this year –– lending, information reporting, foreign bank account reporting, characterization of digital assets, and proof of stake protocols. It also sent a letter to the IRS on the application of the Foreign Account Tax Compliance Act (FATCA) to digital assets.
Since 2016, when the IRS issued a “John Doe” summons to Coinbase seeking information on customers who engaged in transactions at or above $20,000, the digital assets community has seen growing enforcement-related activity as the IRS began focusing on identifying taxpayers who may have tripped up by lack of clarity.
In 2020, the agency added a question relating to cryptocurrency on its Form 1040 for individual taxpayers. “At any time during 2019,” the IRS asked, “did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” And for the 2020 tax season, the agency moved the question right to the top of the form, displayed prominently just below the request for personal information. The IRS also sent over 10,000 taxpayers “soft letters” suggesting they may not have complied with tax reporting requirements and threatening an audit if the taxpayers did not respond to the agency’s inquiry. These letters were criticized as violating the Taxpayers Bill of Rights by the IRS’ own Taxpayer Advocate.
Recently, at a hearing before the Senate Committee on Finance, IRS Commissioner Chuck Rettig identified the need for clarity on information reporting for cryptocurrency transactions. Information reporting requires companies to report to the IRS wage and non-wage income that relate to a trade or business. Information reporting guidance would result in increased tax compliance and decreased enforcement actions. The Chamber brought this to the IRS’ attention in a letter last year describing the need for guidance regarding information reporting – a key tool to assist taxpayers in providing accurate income information – but the agency has yet to release such guidance. In addition to the Taxpayer Advocate, the IRS has been criticized repeatedly for not providing guidance by the Treasury Inspector for General Tax Administration and the Government Accountability Office.
Highlights of the Tax Policy Framework:
The Chamber’s policy framework identifies key areas in which the IRS must provide clarity and guidance for digital asset transactions in 2021. The goal of these recommendations is to ensure that digital asset tax policies are adopted to assist compliance and encourage innovation, economic activity, entrepreneurship, investment, and collaboration in the areas of:
- Digital asset lending;
- Information reporting;
- Foreign bank account reporting;
- Characterization of digital assets; and
- Proof of stake protocols.
In addition to its policy framework, the Chamber separately wrote a letter to the IRS on the potential application of the Foreign Account Tax Compliance Act to digital assets. The law requires foreign financial institutions to report foreign accounts held by U.S. persons. Currently, the law does not apply to digital assets. Nevertheless, anticipating that the IRS is considering the application of FATCA to digital assets held offshore, we provide guidance to ensure better outcomes for the industry before they are published.
Our letter raises key factors the IRS must take into account, such as:
- The need for public notice and comment if the IRS decides to apply FATCA to digital assets.
- What is a “foreign” account in the digital asset industry?
- Are digital assets financial assets?
- What types of accounts (custodial, non-custodial) should be subject to FATCA reporting?
The policy framework and letter regarding FATCA’s application will enable better compliance with tax obligations by taxpayers and avoid unnecessary punitive measures by the IRS.
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