IRS crypto guidance every tax practitioner should know
The IRS is getting serious about cryptocurrency. This fall, it released three documents that all tax practitioners need to pay attention to ahead of the 2019 filing season: a retroactive revenue ruling, FAQs for reporting cryptocurrency ownership and a draft of Form 1040 that asks taxpayers about their financial interest in virtual currency.
On Oct. 9, the IRS released an authoritative revenue ruling that specifically addresses situations in which a taxpayer receives auto-generated cryptocurrency. According to the IRS, this type of situation – known as a hard fork and airdrop – always triggers a tax obligation. Thus, because forks and airdrops are often unprompted by the individual who owns cryptocurrency, a taxpayer could receive digital currency against their wishes and still must pay taxes on it.
Moreover, this ruling is retroactive and does not provide any safe harbor or transition relief. For taxpayers to fully comply with the rule, they will need to file amended returns. In other words, an individual can be taxed on something that occurred in 2016 and also must pay a penalty and interest.
The AICPA® plans to issue a comment letter to the IRS in early 2020 to address concerns with this ruling, including its retroactive nature and lack of transition relief for taxpayers.
Guidance for tax practitioners and taxpayers
In conjunction with the revenue ruling, an IRS “Frequently Asked Questions” document addresses several issues cryptocurrency owners have long asked about, including those related to calculating income, gifts, and gains and losses.
Additionally, the FAQs provide information on basis when real currency is used to purchase virtual currency. Here, the IRS states that the cost basis is determined by adding up the total money spent to acquire crypto assets, “including fees, commissions and other acquisition costs in U.S. dollars.”
Draft Form 1040
An early release draft of Form 1040 showcases how serious the IRS is about reporting cryptocurrency ownership. The first question on Schedule 1 asks, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?”
Should the question remain on the form’s final version, CPAs will be required to ask clients about cryptocurrency ownership. As such, the AICPA recommends that tax practitioners add this question to their updated tax organizer.
To make sure you and your clients meet IRS expectations, the AICPA and CPA.com also made three recommendations in our Special Report from the 2019 Blockchain Symposium:
- Adhere as closely as possible to information the IRS provided.
- Be conservative with all documentation, including how gains and losses are accounted for.
- Be consistent in your approach. Do not skip back and forth between accounting methods.
For more information on the IRS’ ruling and FAQ, check out the AICPA’s webcast IRS Guidance on Taxation of Virtual Currency from 1–2pm ET and Jan. 14. Save 20% with promo code IRSG19.
Lindsay Patterson, Director – Corporate and Integrated Communications, Association of International Certified Professional Accountants
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