Last Updated: September 25, 2020
This post was originally published on Forbes by Shehan Chandrasekera on February 14th, 2020
The Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. On February 12, 2020, GAO published “Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance (GAO-20-188)” report after analyzing IRS’s efforts in the crypto tax compliance space. GAO reviewed IRS forms and interviewed various stakeholders such as IRS officials, FinCen, other federal agencies, tax practitioners and crypto exchanges to produce this report. This post discusses some of the highlights of this report and how they may affect crypto tax holders in the US.
2019 Crypto FAQs May Not Be Binding
GAO points out that the 2019 crypto tax guidance is not binding to the IRS; they could be subject to change and can not be relied upon by taxpayers as authoritative. According to the IRS, IRS’s authoritative interpretation of tax law should be published through Internal Revenue Bulletins (IRB). For example, on April 14, 2014, the Notice 2014-21 was featured on IRB 2014-16. On October 9, 2019, the IRS published FAQs on their website further explaining the original cryptocurrency guidance, the IRS Notice 2014-21. Since the 2019 FAQs were not featured on any IRB, GAO argues that they may not be binding on the IRS. Also, the IRS has changed 2019 crypto tax guidance a couple of times without alerting anyone. For example, the IRS added 2 extra Q&As to the original 43 FAQs during December 2019 without announcing anywhere. More recently, the IRS abruptly removed gaming tokens such as Robux and V-bucks from the explanation of “What is virtual currency?”.
Further, the IRS did not add any disclaimer on the page indicating that the FAQs are non-authoritative guidance and is subject to change. Changing information without alerting taxpayers is also a violation of the first article in IRS’s Taxpayer Bill of Rights - “The Right to Be Informed”. According to GAO, “If taxpayers make decisions based on guidance that is non-authoritative, including FAQs, those taxpayers’ confidence in IRS and the tax system could be undermined if the content is later updated and IRS challenges taxpayers’ positions”.
Further, GAO points out that 2019 guidance lacks clarity. It fails to properly understand technical subjects like airdrops & forks and provide no guidance on areas such as foreign reporting, retirement accounts and mining.
Information Reporting Needs More Clarity
The report also shows how existing information reporting requirements are unclear. Currently, crypto exchanges issue various tax forms like Form 1099-K, 1099-B & 1099-MISC. Some exchanges do not report anything whatsoever. This is because the service has not come up with clear guidelines regarding cryptocurrency information reporting requirements so exchanges are interpreting existing laws in different ways.
GAO recommends that the IRS should look into improving information reporting because it naturally leads to higher compliance. For example, if you receive a W-2 or a similar tax form, you are more likely to report that on your taxes. The IRS agrees with this recommendation and is working on a potential solution.
Crypto Foreign Reporting Requirements Are Unclear
Finally, GAO recommends that the IRS and FinCen should come up with clear guidance answering whether cryptocurrencies held in overseas locations are subject to Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) reporting, respectively. Interestingly, the IRS disagreed with this recommendation and stressed that it may look into this issue in the future when the activities of foreign exchanges become more transparent. In contrast, FinCen agreed with the recommendation and mentioned they will issue a public statement about the exact reporting requirements soon.
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Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.