Even though the cryptocurrency market came close to a trillion dollars in market cap during the last bull run, the United States’ Internal Revenue Service has still not clarified their stance on how cryptos should be taxed.
The last time the IRS issued guidance on cryptocurrencies and how they were to be taxed was in 2014, an eon in the rapidly changing sector, and even that dictum was vague and ambiguous.
In response to this, twenty-one bipartisan lawmakers have drafted a letter which they hope will force the IRS to clarify its position on cryptocurrencies and how they should be taxed.
The Letter
The letter, which was drafted to IRS Commissioner Charles Rettig, can be well summarized in two sentences, “there is still substantial ambiguity on a number of important questions about the federal taxation of virtual currencies. We urge the IRS to issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies.”
While the cryptocurrency ecosystem has been slandered in the past as a haven for tax dodgers, the truth is that a majority of crypto users want to stay on the right side of the law and pay their taxes. However, they can’t do that if they don’t know what to pay.
Taxing Cryptocurrency Forks
On a list of three issues that the twenty-one lawmakers deemed urgent, the third was, “the tax treatment of forks for taxpayers that use virtual currencies, such as the 2017 hard fork of the Bitcoin blockchain.”
When Bitcoin split into Bitcoin Cash, it left a lot of investors with a coin that they hadn’t paid for. How should a coin which a person receives for free be taxed? There is obviously nothing in the history of taxation to cover an event like this and unless the IRS releases new guidance on the topic there is no sure way to know the proper amount to pay.
Determining Cost Basis
Further, the lawmakers urged the IRS to clarify its position on a cost basis. Cost basis is the price at which an asset is purchased and it determines how much tax a person needs to pay when they sell.
Currently, the IRS says that an investor must determine cost basis in a, “a reasonable manner that is consistently applied.” This is very ambiguous. What does “a reasonable manner” mean? What if an investor’s idea of “a reasonable manner” is different than the IRS’ understanding of it?
This proved to be an especially important topic with the lawmakers as they said, “there is particular urgency in resolving the ambiguity around basic questions of how taxpayers should calculate and track the basis of their virtual currency holdings.”
The IRS Response
While the letter was only recently sent and a response cannot yet be expected, the IRS has proven to be uncooperative in the past. In the fall of 2018 Kevin Brady, the chairman of the House Ways and Means Committee, sent a similar letter to the IRS. He never received a response.
Of course, clarity on how cryptocurrencies should be taxed is not the only problem the IRS must contend with. In the United States, crypto is classified as a property which means that taxes must be paid on every single transaction, even if a person is just buying a sandwich. This is clearly untenable and if the laws are not revised, it’s going to push cryptocurrency innovators out of America to other countries with more friendly regulations.
It’s hard to say why the IRS has proven so recalcitrant about issuing helpful cryptocurrency taxation guidelines, whether they don’t understand blockchain or just don’t like it, but if they don’t clarify their position on how it should be taxed everybody loses.