While there are many reasons for people to invest in any given financial platform, the attraction of investing in cryptocurrency has long been rooted in the platform’s anonymity, lack of oversight, and inherent decentralization. As such, many investors, relying on the anonymous and unregulated nature of cryptocurrency, have not reported their earnings to the IRS and have avoided disclosure without consequence. However, recent indicators from prominent tax practitioners, the IRS, and the Department of Justice are hinting at the demise of the days of abject anonymity in the crypto-world.
At a recent May 12th tax conference, a specific panel called “Life Cycle and Tax Implications of a Cryptocurrency” discussed ways in which the tax landscape is changing for cryptocurrency investors. Two major themes emerged from the panel—the Internal Revenue Service (IRS) is stepping up their enforcement capabilities, and the Department of Justice (DOJ) is primed to prosecute cryptocurrency crimes.
First, the IRS is increasing its efforts to enforce current tax laws regarding various cryptocurrency transactions. Bryan Skarlatos, an attorney with cryptocurrency experience who participated on the panel, discussed one specific realm in which he sees the IRS bolstering their strength—withholding of tax on nonresident aliens who receive payment in the form of cryptocurrency.
The requirement under IRC Section 1441 to withhold 30 percent of payments to non-resident aliens is nothing new. It is a current provision of the tax code that applies to a broad range of income items including interest, dividends, rent, salaries, wages, premiums, remunerations, emoluments, or other fixed items of determinable gains under Section 631. Payment of a salary or wage in the form of cryptocurrency falls under the scope of Section 1441, and Mr. Skarlatos believes the IRS will likely enforce this provision and assess applicable penalties as applied to nonresident aliens as early as this year.
Second, Jason Poole, an attorney with the tax division of the DOJ, indicated the Department is well-poised and well-prepared when it comes to understanding, identifying, and prosecuting cryptocurrency crimes. He spoke about high-profile cases that have provided the DOJ with institutional knowledge on matters of cryptocurrency, and indicated that mainstreaming currencies would allow criminal enforcement officials to prosecute cases with greater ease.
All in all, cryptocurrency may still be generally unregulated, but the IRS and DOJ are beginning to focus on enforcement. The government is well aware of the significant economic value wrapped up in cryptocurrency and is prepared to enforce current provisions of the Code to assess tax. Should you have any questions regarding cryptocurrency, or any other complex tax issue please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at Steven.Miller@alliantgroup.com.