As the tax season winds to a close, tax practitioners and taxpayers can once again begin the process of looking ahead. However, this tax filing season has left several questions unanswered. In particular, the treatment of certain cryptocurrency transactions have left taxpayers searching for answers without a clear path forward.
Generally, the basic tax treatment of cryptocurrency has been addressed. In Notice 2014-21, the IRS alerted taxpayers that cryptocurrency will be subject to the same laws surrounding other forms of property. Although this concept seems straightforward, the nature of cryptocurrency has already lead to several substantial complications. For instance, simply determining the value of a cryptocurrency at any given moment may depend greatly on the exchange you are looking at and, given the volatility of the market, the time of day.
Compounding these issues is the general lack of public understanding surrounding the taxability of cryptocurrency. In US v. Coinbase Inc., the government asserted that between Jan. 1, 2013 and Dec. 31, 2015 only 800 to 900 taxpayers reported Bitcoin related items on electronically filed Forms 8949. However, Coinbase alone has a reported 5.9 million registered users, meaning a large number of taxpayers are not properly reporting their cryptocurrency transactions. This could be due to taxpayers being generally unaware of their requirement to report such transactions. Mining cryptocurrency, selling cryptocurrency for cash, and exchanging cryptocurrency for other property may all lead to realization events requiring taxpayers to pay tax.
From this backdrop, several new issues have risen. First, 2017 saw Bitcoin undergo several hard forks. A hard fork, explained at a high level, is a splitting of cryptocurrency into a new currency and an old currency based on changes to the underlying blockchain code. Individuals owning cryptocurrency subject to a hard fork will own both the original cryptocurrency and the new “forked” currency. However, when and how the individual gains access to the “new” currency depends on several outside factors, such as whether the individual is holding their cryptocurrency in an exchange. This leads to unanswered questions such as, whether this a realization event, what is the value of the new currency, and what is the taxpayer’s basis in the both strands of cryptocurrency.
There are other outstanding questions regarding the treatment of individuals who mine cryptocurrency. Are taxpayers that mine cryptocurrency performing a service or manufacturing property? Tax practitioners may also want to take self-employment taxes and possible IRC 199A considerations into account when advising clients on how to structure cryptocurrency mining operations.
Simply put, there are a host of questions surrounding cryptocurrency in the wake of Notice 2014-21. Even something as fundamental as the form and line to report cryptocurrency income isn’t entirely set in stone. Taxpayers having engaged in, or planning to engage in, cryptocurrency transactions should consult a tax professional to determine the tax consequences of their actions. 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.