An advisory committee to the U.S. Internal Revenue Service (IRS) believes the agency should provide clearer guidelines on how cryptocurrency transactions may be taxed.
In a new report published on October 24, the Information Reporting Program Advisory Committee (IRPAC) highlighted cryptocurrencies’ rise in popularity, noting that “there has also been an equal rise in question as to the applicable tax consequences.”
The IRS has already issued one notice back in 2014 stating that cryptocurrencies are treated as a form of property for tax purposes, reiterating that position in a statement published in March ahead of the April 15 tax filing deadline.
Yet according to the report, “many industry and tax practitioners still question other tax consequences of cryptocurrency transactions.”
The report goes on to state:
“Can cryptocurrency be considered a specified foreign financial asset? How is the basis determined for cryptocurrency that is sold? Does broker reporting apply to cryptocurrency transactions? Therefore, IRPAC recommends that the IRS issue further guidance on the tax consequences of cryptocurrency transactions.”
A discussion further in the report explains that cryptocurrencies and their potential tax liabilities within the U.S. may be as much as $25 billion, according to a research note published by Fundstrat Global Advisors. However, this number is based on a figure of $92 billion in taxable gains for U.S.-based cryptocurrency investors.
The report adds that, according to Fundstrat, as much as 50 percent of cryptocurrency-related tax liabilities may have gone unreported – though it concedes that this number might not be correct.
“Whether or not these estimates are accurate, they clearly underscore the need to gain more information on the operations of these protocols and to ensure that taxes that may be applicable to them are efficiently collected,” the report continues.
The report also acknowledges that some investors may use exchanges based outside of the U.S., or invest in cryptocurrencies designed to enable anonymity so as to avoid paying taxes. It proposes cooperating with other governments and applying existing legal guidelines, including information reporting rules.
That being said, the report also notes that “there remain significant open issues,” which will require analysis and guidance to clarify how the term “transaction” may be defined.
“Many, if not most, taxpayers will report these activities correctly if they are able to determine the implications of their cryptocurrency activities,” the report says.
Bitcoin and tax return form image via Shutterstock
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Author: Nikhilesh De