Pub. 2 2020 Issue 5

S E P T E M B E R / O C T O B E R 2 0 2 0 22 nebraska cpas IRS STEPS UP CRYPTOCURRENCY TAX ENFORCEMENT EFFORTS BY MARCUS E. DYER, CPA, ESQ., WITHUM When the first versions of cryptocurrency were formulated back in the 1980s, scant evidence of concern could be found from the government. In 2017, after the Treasury Inspector General for Tax Administration criticized the IRS for failing to develop a coordinated virtual currency strategy, the IRS announced concern over “massive” underreporting of income generated by cryptocurrencies. Today, a question appears at the top of Schedule 1 of Form 1040 inquiring if the taxpayer engaged in any virtual currency transactions during the year. This article addresses current IRS efforts to stay ahead of the cryptocurrency curve and promote compliance with income tax laws applicable to virtual currency. How Is Cryptocurrency Taxed? The IRS explains the taxation of cryptocurrency in Notice 2014-21. It says virtual currency is treated as property, not as currency, for U.S. federal tax purposes. Generally, this means payments made using virtual currency to independent contractors are taxable, and self-employment tax rules generally apply. Wages paid to employees using virtual currency are taxable to the employee and must be reported by an employer on a Form W-2. Transactions involving an exchange between cryptocurrency and other property are taxable as gains or losses. What Cryptocurrency Enforcement Challenges Exist? In recently published guidance, the IRS addresses some of the common misunderstandings taxpayers have with respect to the taxation of cryptocurrency transactions. Common areas of confusion exist with respect to “coin-to-coin” exchanges, hard fork transactions, and the determination of basis. ✓ Currency-to-currency exchanges. Some taxpayers mistakenly believe coin-to-coin trades, such as Bitcoin for Ethereum cryptocurrency, is a nontaxable