Your Cryptocurrency Stinks. And the IRS Smells it.
Sniff — sniff.
What’s that in your wallet? It smells vaguely familiar.
The IRS is sniffing around, and it has an idea.
Sniff-sniff.
You may think it’s cryptocurrency. But to the IRS, if it looks like money, acts like money, and especially if it smells like money… it is money. And you know what happens when the IRS smells money. The IRS wants some.
In letters to over 10,000 suspected holders of crytocurrency (“obtained through various IRS compliance efforts” is all the agency will say regarding how those holders were identified), the agency outlines how cryptocurrency is currently being viewed, and why that categorization is causing the agency to put currency owners in the file drawer labeled “Here we come, baby.”
Three versions of the letter went out. Only one of them demanded a response, but the others certainly encouraged suspected crypto holders to amend their tax forms to include currencies that weren’t reported or were under-reported.
In question-and-answer form, the IRS takes six pages to make its case that if you were paid in cryptocurrency, either as a business or individual, or mined cryptocurrency, or owned cryptocurrency that appreciated in value from the time you obtained it, or bought or sold things of value with cryptocurrency, your currency must be considered convertible, meaning it could be converted to something of value — like money. While you may not owe taxes yet if you haven’t converted it, the agency is trying to get you on the record about it and to let you know it’s real.
A DIFFERENCE OF OPINION FROM ON HIGH
Which is interesting when you consider the point-of-view on cryptocurrency expressed by our President.
During that week when Facebook executive Davis Marcus was testifying about the proposed Facebook currency Libra, President Trump took a little time out from his busy schedule to tweet about it.
“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” he said.
So is it just a lot of air? Or does that air have a familiar aroma? And what is the IRS really up to with these alarming letters?
THE IRS IS FISHING
According to people familiar with the IRS’ aims, the agency is looking for a large fish to throw on the grill. It is hoping the publicity around snagging the big one will flush all the other fishies into the open waters. If you’ve been amassing a crypto fortune and have tried to keep it hidden, you are on notice. And if they get ya, they can really get ya, with fees and penalties for late reporting.
What is frustrating for holders and their tax and investment advisers is that for a long time the IRS has been promising guidance in this area, and the letters have gone out before the guidance has been issued. The reason that’s important is, while the IRS has indicated your crypto may be property (meaning it is taxable on sale or transfer), there is also the possibility the Securities and Exchange Commission (SEC) could decide is a security (ouch) or that the Commodity Futures Trading Commission could decide it is a commodity (double ouch), which are all assessed under different tax rules and at different rates. Using it offshore, using it to transfer from one currency to another, using it to test on tiny purchases — what is reportable?
WHAT TO DO?
One tax professional consulted for this story said that most of the issues regarding categorizing these currencies have been resolved, and that a trained professional can guide you through the reporting process. He also said that it’s wise to take these letters seriously.
In fact, I haven’t spoken to one tax or financial expert who has said it’s a good idea to ignore the IRS, so anyone receiving a letter is likely getting that same advice from his or her professional. If rulings change, you can always amend your returns down the line. Even in the current environment you can try to negotiate a settlement with the IRS, or create a payment plan that stretches out your obligation. Any of those approaches can limit your exposure to penalties later.
And hey, there is good news in all of this. Now that the IRS is on to you, should your holdings crash, you can always claim a loss.
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