Expert: Cryptocurrency taxation ‘high enforcement priority’ for IRS, but hindered by uncertainty

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Quick Take

  • The Internal Revenue Service is considering cryptocurrency taxation a “high enforcement priority,” according to a taxation expert
  • The agency also states that virtual currency is an ongoing focus area for its criminal investigation department
  • The IRS may be exaggerating the severity of tax law violation issue among digital asset holders, given that there is no clear guidance on what constitutes a cryptocurrency tax crime, said the expert

The Internal Revenue Service is considering cryptocurrency taxation a high enforcement priority, but it may need to offer more concrete guidance before moving forward with its enforcement activities, says one expert. 

According to tax attorney Guinevere Moore, the IRS is equipping its employees with knowledge on blockchain and dedicating special agents to collect cryptocurrency taxes. The agency may also believe there’s a serious tax law violation issue among cryptocurrency holders, hence the heavy involvement of its criminal investigation team in enforcing cryptocurrency taxation. As previously reported by The Block, the IRS is sending out 10,000 letters to cryptocurrency holders, urging them to report their digital assets and pay taxes properly. 

Moore thinks the IRS may be exaggerating the severity of tax violation when it comes to cryptocurrencies, especially given that there is no clear guidance on how to report holding on this new asset class. 

“As much as the IRS says this is a criminal enforcement issue for us, the reality is, in order for them to actually make it a criminal enforcement priority and get traction on that, they need to have more guidance,” said Moore. 

To date, IRS has only issued one guideline in 2014 on digital asset taxation, stating that the nascent asset class is subject to the same tax principles as applied to property transactions. However, compared to the rapid development of the digital asset market, this 2014 guidance seems outdated. 

For example, there have been many debates over whether cryptocurrencies received due to a hard fork should be subject to the same tax principle. Regulatory uncertainty surrounding this issue loomed particularly prominently in 2017 when the Bitcoin Cash hard fork emerged, and the IRS has yet to issue any guidance on that. 

“If the IRS truly want to bring crypto users into compliance, there are ways to do it that are more effective than having criminal enforcement,” said Moore.

The IRS might have created panic among cryptocurrency holders with the 10,000 letters it is sending out, some including strong language indicating people who fail to report crypto holdings “may be subject to future civil and criminal enforcement activity.” However, Moore pointed out that it may be difficult to decide what constitutes cryptocurrency tax crime without clear taxation guidance. 

A tax crime refers to taxpayers knowingly neglecting their duties to report their assets and pay taxes accordingly. However, since cryptocurrency is still a nascent asset, it may be difficult to distinguish between people intentionally fail to report their holding and cryptocurrency holders genuinely not knowing what kind of cryptocurrency-related transactions should be reported to the IRS.

“I am certainly troubled that the IRS issued these letters before we saw additional guidances when even the IRS has acknowledged that additional guidance is needed,” said Moore. 

“Intentional violators like those investigated by IRS-CI [criminal investigation] are an extremely small subset of crypto users,” she added. 

The IRS told The Block that a new guideline on digital asset taxation is in the pipeline.