More Difficulty in Making Tax Payments on Cryptocurrency GainsAdam Gardiner
When it comes to tax issues, it’s always a good idea to hire a tax adviser, particularly if you have complicated returns. And when it comes to investments in cryptocurrencies, which are still sorely lacking in guidance, that’s even more true. While the Internal Revenue Service (IRS) has issued guidance in both 2014 and 2019 related to cryptocurrencies, just what guidance has the force of law is still up in the air.
The Government Accountability Office (GAO) recently published a report about the IRS’ treatment of and approach to cryptocurrencies. Most notably, GAO’s report pointed out that some of the guidance IRS published in 2019 is not binding. That’s because the IRS has stated that only tax guidance published within the Internal Revenue Bulletin (IRB) is binding on taxpayers. And because some of the guidance in IRS’ 2019 publication wasn’t published in the IRB, it isn’t binding on taxpayers until it is published in the IRB.
GAO also made recommendations to the IRS that it inform taxpayers that its 2019 guidance is non-binding, as well as clarify details about whether foreign accounts holding cryptocurrencies require reporting under existing Foreign Account Tax Compliance Act (FATCA) laws and regulations. We’ll see whether IRS follows through on any of those regulations. Given how long the agency took between its two guidance issuances, it may be another five years before we get a full look at how the agency wants to tax cryptocurrencies.
For investors who are invested in cryptocurrencies for the long haul, such as by investing through a cryptocurrency IRA, and who don’t divest themselves of their holdings or otherwise take a distribution, they don’t have much to worry about yet because they aren’t creating any taxable events. But for investors who may be active in taking distributions, or converting holdings from one cryptocurrency to another, they may be opening themselves up to tax consequences that they may not know about. Or they may hold a cryptocurrency wallet that is set up in a foreign country without realizing it, potentially opening them up to reporting requirements and penalties if they don’t comply.
We’ve said it before and we’ll say it again: if you’re going to jump feet first into the world of cryptocurrencies, be sure to consult with a tax adviser come tax time. While cryptocurrencies can offer a great deal of asset growth and help diversify your investment portfolio, failure to comply with tax law, even if inadvertent, can result in penalties that can set your investments back years. Don’t let that happen to you.