FOIA documents reveal cryptocurrency guidance has not been a priority for the IRS
The agency’s self-imposed target date for guidance passed last week without action, now Congress is stepping in
On May 16th, in response to a letter from 21 members of Congress, IRS Commissioner Charles P. Rettig wrote, “I share your belief that taxpayers deserve clarity on basic issues related to the taxation of virtual currency transactions and have made it a priority of the IRS to issue guidance,” and that additional guidance would be issued “soon.” Two weeks later, at a May 30th Federal Bar Association conference, Commissioner Rettig was more precise about the guidance’s timing, saying that it would be “coming out very soon—could be within the next 30 days, could be even less than that.” May 30th was 40 days ago, and there is no new guidance.
As we detailed in our April report "A Duty to Answer", US taxpayers currently lack guidance on basic tax issues like how to calculate the fair market value of cryptocurrency, how to determine the basis of cryptocurrency dispositions, and how to account for network forks and airdrops. That report also contains suggestions for common-sense, clarifying guidance that the agency could issue at any time. To date, the agency has published a single piece of guidance on the topic: 2014's Notice 2014-21. Numerous stakeholders within and without the government have noted that 2014 guidance’s failure to address these and other basic tax questions, and have made repeated requests to the IRS for additional guidance.
Following the commissioner’s public statement that guidance would be coming “within the next 30 days,” we were hopeful that we would have more clarity on these issues by now. That we do not is disappointing. As the IRS National Taxpayer Advocate noted in her 2008 Annual Report to Congress, the IRS has a "duty to answer all of the basic questions about transactions undertaken regularly by significant numbers of taxpayers, such as those involving virtual items (described above), especially if the questions are difficult for taxpayers to answer on their own." In that report, the Advocate identified the ambiguous tax treatment of transactions involving virtual economies and currencies as one of "the most serious problems encountered by taxpayers." One of the most serious problems in 2008.
Moreover, in light of a review of documents recently released by the IRS as the result of a Freedom of Information Act (FOIA), we are now left to question where this fits in the IRS priorities. The request shows that during the lead-up to publishing the 2014 guidance, the IRS was aware that:
- Simply stating that "[f]or federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency" without providing clarity on what specific kind of property would raise more questions than it answered;
- The guidance failed to sufficiently specify how taxpayers should calculate the fair market value of a given cryptocurrency on a given day;
- Making the guidance contingent on the cryptocurrency in question being "convertible" under the Financial Crime Enforcement Network's existing guidance would create additional uncertainty; and,
- It was unclear, and the guidance would not answer, whether and when cryptocurrency holdings would trigger Foreign Bank and Financial Accounts (FBAR) and Foreign Account Tax Compliance Act (FATCA) reporting requirements.
The emails further indicate that, within weeks of the publication of Notice 2014-21, the IRS was aware of the ambiguities surrounding:
- What tax lot relief methods are available to taxpayers for cryptocurrency dispositions; and,
- What methods for substantiating tax-deductible donations of cryptocurrency donations over $5,000 are acceptable.
All of these questions, many of which we highlight in our report, remain unanswered today, five years later.
Smart folks like Bloomberg columnist Matt Levine now often tweet, tongue-in-cheek, about the absurdity of cryptocurrencies’ tax treatment and the obvious fact that lots of people simply don’t bother trying to comply. But when the agency in charge of explaining and enforcing the tax code has failed to answer basic questions of tax compliance, what else can you expect? As the National Taxpayer Advocate wrote in 2008, “the IRS needs to produce specific early guidance on difficult issues confronted by taxpayers on a regular basis in emerging areas of economic activity. Otherwise, it risks turning these taxpayers into unintentional tax cheats, establishing noncompliance norms in the industry, and leaving IRS employees without clear guidance about how to do their jobs.”
Fortunately, there are efforts underway in Congress that, if successful, would significantly improve the federal government’s policy on cryptocurrency taxation. One such effort is Representative Tom Emmer’s Safe Harbor for Taxpayers with Forked Assets Act, which was first introduced last Congress and would create a safe harbor from penalties for taxpayers who make a good faith effort to comply with the presently uncertain tax policy surrounding network forks. We worked with Rep. Emmer on that bill and are happy to say that he is reintroducing it today. Another such effort on which we’ve worked is led by Representative David Schweikert and would create a de minimis tax exemption for small capital gains resulting from personal cryptocurrency transactions. A similar de minimis exemption already exists for personal foreign currency transactions, and the Cryptocurrency Tax Fairness Act would simply align the federal tax code’s treatment of cryptocurrencies with its treatment of foreign currencies. We are hopeful that that bill will also be reintroduced soon.