A Duty to Answer: Six Basic Questions and Recommendations for the IRS on Crypto Taxes

U.S. taxpayers lack answers to basic questions about the federal tax and reporting effects of transactions involving cryptocurrencies.

Although the Internal Revenue Service has been examining issues related to the taxation of “virtual property” and “virtual currencies” for over a decade, it has only issued one piece of guidance about them. That guidance, published in early 2014 and applicable only to “convertible” virtual currency, fails to answer basic questions like:

  1. How should taxpayers distinguish between convertible and non-convertible virtual currency, and what is the significance of that distinction?

  2. How should taxpayers determine the fair market value of their cryptocurrency?

  3. How should taxpayers calculate the basis of cryptocurrency dispositions?

  4. How should taxpayers substantiate the value of cryptocurrency donations?

  5. How should taxpayers account for tokens they receive from a network fork or airdrop?

  6. How should taxpayers account for cryptocurrency when filing information returns?

Numerous stakeholders within and without the government have noted the 2014 guidance’s failure to address these and other basic tax questions, and have made repeated requests to the IRS for additional clarity. This report adds to that body of exhortation and recommends actions the IRS could take to resolve these open questions. Rather than indicating any intention to provide additional guidance, the IRS seems to be ramping up enforcement activities against taxpayers who “misreport” the tax consequences of their cryptocurrency transactions.

A direct download of this report is available here.