US: How do you pay taxes on bitcoin? Congress demands explanation.

As published theguardian.com, Thursday 18th April, 2019.


US lawmakers asked the Internal Revenue Service how US residents should pay taxes on bitcoin and other cryptocurrencies, in a remarkable letter that shows just how unregulated the cryptocurrency space remains.

More than a decade after bitcoin was first introduced, the IRS has released just one public notice on how to pay taxes on digital holdings. That lack of guidance is leaving American taxpayers with “unacceptable” ambiguity on reporting requirements, the letter signed by 21 members of Congress on Monday said.

“Taxpayers deserve clarity on several basic unanswered questions regarding federal taxation of these emerging exchanges of value,” according to Tom Emmer, a congressman from Minnesota who signed the letter. “Guidance is long overdue and essential to proper reporting of these emerging assets.”

The IRS did not respond to a request for comment.

As it stands, cryptocurrency is treated as property by the US government, meaning capital gains taxes apply to every transaction, whether it’s buying a $1m home or a $2 cup of coffee.

But questions remain regarding how to determine the value of currencies at a given time and how to account for events like initial coin offerings, in which companies raise money by selling virtual currencies to investors. Thousands of initial coin offerings have raised billions of dollars in recent years, making reporting increasingly complex.

“From a tax reporting standpoint, it can be very complicated just tracking the gains and losses on each transaction, but it gets more complex year after year,” said Alex Kugelman, a tax attorney based in San Francisco who counsels clients on paying cryptocurrency taxes. “There is virtually no guidance and it is very frustrating trying to navigate.”

At the time the IRS guidance that mentioned digital currencies was issued, one bitcoin was worth $496. In the years since, it reached a record high of nearly $20,000 and a $334bn market capitalization in December 2017. As of the time of publishing, the value rests at around $5,000 per bitcoin.

Questions remaining, according to the letter, include how taxpayers should calculate the fair market value of notoriously volatile currencies, how to track exchanges, and how to account for forks in the blockchain, which are fundamental changes to the protocol on which bitcoin and other cryptocurrencies run. Kugelman said some of these intricacies could mean differences of more than six figures for some of his clients when it comes to filing taxes.

Despite the confusion, the IRS has suggested it is enacting more aggressive enforcement towards taxpayers who misreport or underpay taxes on digital currencies, according to an April 2019 report from Coin Center, a not-for-profit research center focusing on blockchain technology. In a March 2018 news release, the IRS threatened a prison term of up to five years and a fine of up to $250,000 for anyone convicted of tax evasion related to digital currency holdings.

The letter from Congress may serve as a form of protection for digital currency traders being audited for tax reasons, noted Kugelman.

“This letter is kind of remarkable,” he said. “If any of my clients are audited, I am going to present this to auditors – how can the IRS take enforcement action against taxpayers when there is such an obvious lack of guidance?”

Congressmen are requesting a written response from the IRS outlining plans to issue updated guidance on virtual currencies by 15 May 2019.

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