Cryptocurrency has brought about uncertainty for investors for both investors and lawmakers. A significant point of contention is whether investors are obligated to pay taxes on their cryptocurrency transactions. And to further add fuel to the uncertainty, the Internal Revenue Service has been fervently gathering data from cryptocurrency exchanges since the start of 2018 to determine whether taxpayers are reporting and paying taxes on their transactions.
In January 2018, the IRA prevailed against exchange giant Coinbase. The ruling allowed the IRS access to financial documents attributed to the Coinbase’s customers. Steven Toscher, a tax attorney, stated at New York University’s Tax Controversy Forum,
“Some of the press reports indicate that there were some $90 billion of unreported gains in 2017. That’s when we got the big spike in bitcoin-related currencies. There’s not a lot of cryptocurrency transactions being reported on tax returns. I think the jury is still out.”
Gary Alford, a IRS criminal investigations special agent and head of the black market “Silk Road” task force warned investors about noncompliance, stating
“We have been involved in this since 2013 so we are ahead of the curve . . . not we’re waiting to see as more and more information comes out, we’re looking to use some of that information that we’ve collected.”
In light of the data gathered by the IRS, it has taken a hard line stance concerning whether investors must pay crypto taxes. Legislation is bound to come out that will enable the IRS to review crypto as a taxable good. On the other hand, investors do not seem pleased with the development. Many believe that the IRS is overstepping its authority by collecting customers’ financial records.
As the issue currently stands, both the IRS and legislators are looking for ways to create clearer and defined rules and laws. According to Toscher, simple mechanism for recording crypto transactions need to be available as well. In his own words,
“There are a lot of cryptocurrencies. There are a lot of different exchanges out there, totally unregulated at this point, or largely, though the SEC is is starting to look at those. But this is all computer-driven information. It lends itself to information reporting. Broker-dealers have to issue their own 1099s, their basis information, and I think that’s what Treasury and the IRS need to be looking at if this is truly going to be a significant part of the economy. You see big brokers moving into this area, so I think we need to start looking at that.”
The best thing that investors can do at this point is to keep regular records of their crypto transactions and holdings. There are several services o the market that are available that can help calculate capital gains and the calculation can then be exported as a report as one files their taxes.