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U.S. Digital Currency Tax Confusion

October 29, 2018



An advisory committee of the U.S. Internal Revenue Service (IRS) published a report of their current issues. One of the biggest gray areas they are dealing with is cryptocurrency use. They cite the need for more research and are pushing for additional tax guidelines cryptocurrency use. In 2014 the IRS issued commentary specifically on digital currencies, where taxpayers were instructed to treat them as a property, but this doesn’t nearly bridge the gap.


The issue for regulators in the U.S. continues to appear like a square peg in a round hole situation. Existing financial structures simply don’t have the means to incorporate digital currencies. The overall issue is difficult for regulators to even begin with, because even the subject definition is vague - cryptocurrency, digital currency, virtual currency, blockchain token, and so on.


Cryptocurrency vs. Virtual Currency

The report begins with drawing this distinction, where the IRS cites the European Banking Authority’s definitions, as countries in the EU have been drastically more progressive with research and effective regulation on the new financial technology. 


“Virtual currency is a type of “digital currency,” and is defined by the European Banking Authority ‘a digital representation of value that is neither used by a central bank or public authority nor necessarily attached to a fiat currency but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.’ In turn, cryptocurrency is a category of virtual currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds.”


But this distinction in itself is not cut and dry, as encryption techniques are vital to the operations of virtual currencies as well.


Growing Use, Marginal Tax Gap Implications

In April, Fundstrat Global Advisors estimated that the cryptocurrency-related U.S. tax liabilities could be as high as $25 billion. The figure was based on approximately $92 billion of taxable gains for U.S. cryptocurrency investors. This group only comprises about 30% of global cryptocurrency investors. who, according to Fundstrat, comprise around 30 percent of cryptocurrency investors worldwide.


However, even assuming a noncompliance rate of 50%, these tax liabilities represent just shy of 2.5% of the estimated $458 billion tax gap. Further, this number would have been based on the cryptocurrency market while nearing its all time high. The variation in tradable value of cryptocurrency further complications the ability of taxpayers to properly follow the law.


Further Questions

Are cryptocurrencies and virtual currencies to be treated the same?


Can cryptocurrency be considered a specified foreign financial asset?


How is the basis of type and value determined for cryptocurrency that is sold?


Does broker reporting apply to cryptocurrency transactions?


What is the future of taxation with the existence of anonymous transactions? Thousands of cash transactions go untaxed every year with fiat currency, but will growth in cryptocurrencies make this a bigger problem?



By: BGN Editorial Staff


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