Pub. 2 2020 Issue 5

23 nebraska society of cpas W W W . N E S C P A . O R G Marcus E. Dyer, CPA, Esq., is the team leader of tax controversy at Withum, a Princeton, N.J.,-based nationally ranked public accounting firm providing advisory, tax, and audit services to businesses and individuals on a local to global scale. Dyer may be reached at mdyer@withum.com. This article is reprinted with permission of the New Jersey Society of CPAs. exchange of essentially the same kind of currency. According to the IRS, currency exchanges are subject to the same capital gains and loss rules of property exchanges generally. ✓ Hard forks (chain splits). Taxpayer uncertainty abounds on a common cryptocurrency transaction called a hard fork. A hard fork occurs when cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. Surprisingly, the IRS didn’t provide comprehensive guidance on this topic until 2019 in Rev. Proc. 2019-24. ✓ Tracking basis. According to the IRS, tracking basis is essential for repor ting crypto transactions accurately. Yet, the IRS suspects some virtual currency users have gone years without keeping track of basis out of confusion about its relevance or sheer negligence. How the IRS Is Enforcing the Law The IRS has developed a multi-prong approach to prevent t he evasion of tax laws applicable to cryptocurrency. Elements of the strategy include data analytics, tax examinations, soft letters, and criminal charges. ✓ Soft letters. In 2019, the IRS sent letters to mor e t han 10,0 0 0 holde r s of cryptocurrency warning that audits and other enforcement actions may result if the taxpayer failed to report income from virtual currency transactions and corrective actions are not taken. ✓ Data analytics. Since 2015, the IRS has contracted wit h Cha i na lysi s, a company that provides data and analysis services to help the government identify cryptocurrency users with unreported income. ✓ Tax examinations. In 2018, the IRS announced a Virtual Currency Compliance Campaign. Through this program, the IRS is conducting exhaustive issue- based examinations of tax returns designed to address noncompliance related to the use of virtual currency. ✓ Criminal prosecutions. In extreme cases, taxpayers may be subject to criminal prosecution for failing to properly report income from virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. IRS Criminal Investigation reported in its Fiscal Year 2019 Annual Report that a key focus for the organization is cybercrimes, with an emphasis on cryptocurrencies. Taxpayers who have traded or received cryptocurrency should make sure they have reported their income properly given the IRS’ increasing interest in virtual currency. t 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.