This blog post summarizes recent federal bills that have been introduced (but not yet passed), proposals by the Biden Administration, and guidance issued by the Internal Revenue Service with respect to the taxation of digital assets.
IRS Guidance
Treasury Department Steps Up Its Counter-Ransomware Efforts and Simultaneously Issues New Sanctions Compliance Guidance for Virtual Currency Industry
By Seetha Ramachandran & Peter Cramer on
Recently, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, released a report on ransomware trends stating that during the first half of 2021, 68 different ransomware variants extracted approximately $600 million from victims across the country. FinCEN identified Bitcoin as the most common ransomware-related payment method in reported transactions and noted that ransomware incidents requesting Monero (XMR) – what FinCEN refers to as an anonymity-enhanced cryptocurrency – are increasing as hackers seek to reduce the transparency and traceability of such transactions.
Given this environment, the White House and Treasury Department have sought to counter the ransomware threat by taking a number of actions, including holding a virtual two-day multinational summit on ransomware, conducting classified threat briefings for critical infrastructure executives, and establishing some expected cybersecurity thresholds for critical infrastructure providers. Compounding these efforts, the Treasury Department is leveraging existing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) controls that already apply to fiat currency and enforcing them more deliberately toward virtual currency to combat ransomware attacks.
Two days after the White House issued its October 13, 2021 Fact Sheet detailing these anti-ransomware efforts, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued its “Sanctions Compliance Guidance for the Virtual Currency Industry” (“Guidance”).
IRS Answers Some, but Not All, Questions in Long-awaited Cryptocurrency Guidance
The first official guidance on the taxation of cryptocurrency transactions in more than five years has been issued.
The guidance includes both a Revenue Ruling (Rev. Rul. 2019-24, 2019-44 I.R.B. 1) and answers to Frequently Asked Questions on Virtual Currency Transactions (the “FAQs,” together with Revenue Ruling 2019-24, the “Guidance”) was issued on October 9, 2019 by the U.S. Internal Revenue Service (the “IRS”). The Guidance provides much sought information concerning the tax consequences of cryptocurrency “hard forks” as well as acceptable methods of determining tax basis for cryptocurrency transactions. The Guidance also reasserts the IRS’s position, announced in Notice 2014-21, 2014-16 I.R.B. 938, that cryptocurrency is “property” for U.S. federal income tax purposes and provides information on how the rules generally applicable to transactions in property apply in the cryptocurrency context. However, important questions remain unanswered. It remains to be seen whether more definitive regulatory or administrative guidance is forthcoming.
The Guidance comes amidst an ongoing campaign by the IRS to increase taxpayer compliance with tax and information reporting obligations in connection with cryptocurrency transactions. In 2017, a U.S. district court ordered a prominent cryptocurrency exchange platform to turn over information pertaining to thousands of account holders and millions of transactions to the IRS as part of its investigation into suspected widespread underreporting of income related to cryptocurrency transactions. Earlier this year, the IRS sent more than 10,000 “educational letters” to taxpayers identified as having virtual currency accounts, alerting them to their tax and information reporting obligations and, in certain cases, instructing them to respond with appropriate information or face possible examination. Schedule 1 of the draft Form 1040 for 2019, released by the IRS shortly after publishing the Guidance, would require taxpayers to indicate whether they received, sold, sent, exchanged, or otherwise acquired virtual currency at any time during 2019.[1]
Taxpayers who own or transact in cryptocurrency or other virtual currency should consider carefully any tax and information reporting obligations they might have. Please contact the authors of this post or your usual Proskauer tax contact to discuss any aspect of the Guidance. Read the following post for background and a detailed discussion of the Guidance.
Except where the context indicates otherwise, the tax consequences discussed in this post generally apply to transactions involving cryptocurrency held by a taxpayer as a capital asset. This post does not consider tax consequences other than U.S. federal income tax consequences.