By Sean Stein Smith, CPA, DBA
Many tax-filing deadlines were extended to July 15, or even later, this year due to the COVID-19 pandemic. Does that mean there will be fewer open items for practitioners to worry about? That is not how the tax conversation has evolved over the past few months, unfortunately, especially in the area of cryptocurrency taxation. Cryptocurrencies and cryptoassets have been discussed for several years now, but they remain open items for practitioners offering comprehensive tax services in the space. With bitcoin halving in May 2020, quickly followed by an announcement that hedge fund manager Paul Tudor Jones was allocating 5% of investable assets to crypto instruments, there is renewed interest and focus on the cryptocurrency space.
Also in May 2020, the IRS issued a Statement of Work (SoW) requesting help from the private sector to help verify crypto gains and losses. In other words, and on top of the focus the IRS was already bringing to bear, the private sector is being brought in to create a formidable team. With all of these developments on top of the disruption caused by COVID-19 and the general confusion around tax deadlines and filing requirements, it is easy to overlook the fact that crypto taxation remains an area of uncertainty.
Here are some of the most pressing open items and issues that CPAs providing tax services should be aware of as the extended tax deadlines approach.
There is still no de minimis exemption – No matter how large or small a taxpayer is, and regardless of how much in terms of gains or losses have been incurred, full amounts must be reported. Although numerous groups, including the AICPA, are advocating for the development of an exemption, it has not become reality. Coupled with the question included on the 2019 tax return inquiring about crypto activity, the importance of disclosing all activity – large or small – is of critical importance.
Lack of reporting obligations – As of this writing, cryptocurrency exchanges are under no obligation to provide the same type of reporting and disclosure via 1099 forms as traditional brokerages. While not specifically a tax issue per se, the lack of consistent reporting guidelines can make preparing tax returns and providing tax advice more difficult. This highlights, yet again, the importance of record keeping for clients with crypto holdings and tax preparers.
What generates taxable events? – It should be common knowledge that receiving cryptoassets or using cryptocurrency to pay for goods and services will generate taxable events. That said, gifting or purchasing cryptoassets with U.S. dollars and swapping crypto from wallet to wallet do not generate taxable events. Practitioners need to remain as up to date as possible to provide relevant guidance.
Valuation remains ambiguous – In its FAQs published in October 2019, the IRS mentioned that investors should use valuations available on exchanges. That said, many exchanges are domiciled overseas and are not eligible for U.S. investors to use, and the recommendation is of limited use for thinly traded or newly issued cryptocurrencies. Considering there are thousands of cryptocurrencies traded on a daily basis, the odds of every single one being widely traded on a U.S.-based exchange is unlikely at best.
Lack of authoritative guidance – Although the IRS did just recently issue FAQs and a revenue ruling, and as newsworthy as they were, the FAQs are not legally binding. They can change at any time, and actually have already been slightly modified since initial issuance.
Offering tax services in any fast moving area requires practitioners to be nimble, proactive, and adaptable to changing circumstances. Blockchain and cryptoassets represent some of the fastest moving and most dynamic technologies of the last several decades, and with such speed come numerous questions. Practitioners looking to provide much-needed tax guidance required by the marketplace must invest the necessary time to remain up to date, but they can provide meaningful value to clients now and moving forward.
Sean Stein Smith, CPA, DBA, is a professor at the City University of New York – Lehman College, a 2019 visiting research fellow at the American Institute of Economic Research, and the chair of NJCPA’s Emerging Technologies Interest Group. He can be reached at firstname.lastname@example.org or on Twitter @seansteinsmith.
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