Lawmakers want guidance from IRS on taxation of cryptocurrency

House Ways and Means Committee Chairman Kevin Brady, R-Texas, and other Republicans on his committee have sent a letter to the Internal Revenue Service asking for more detailed guidance for taxpayers about virtual currencies such as Bitcoin and Ethereum.

In 2014, the IRS issued guidance on virtual currencies in Notice 2014-21 in the form of frequently asked questions, including information that the IRS would treat digital currency as property for tax purposes. IRS Commissioner John Koskinen later referred to it as “preliminary guidance.” But since that time the agency has posted no official updates or guidance, despite calls from Congress and groups such as the American Institute of CPAs asking for more information. The IRS has undertaken significant enforcement actions towards taxpayers who use virtual currencies, including a John Doe summons against users of the popular Bitcoin exchange Coinbase.

“While the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS’s duties as the nation’s tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them,” Brady and his colleagues wrote in a letter Wednesday to IRS acting commissioner David Kautter. “A failure to put forth adequate guidance severely hinders taxpayers’ ability to do so. The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.”

Andrew Harrer/Bloomberg

The letter follows an earlier letter sent to the agency in May 2017 from Brady, then-Oversight Subcommittee Chairman Vern Buchanan, R-Florida, and Senate Finance Committee Chairman Orrin Hatch, R-Utah, asking questions about IRS enforcement actions against individuals virtual currency holders like those in the Coinbase summons.

Brady and his colleagues — Ways and Means Oversight Subcommittee Chairman Lynn Jenkins, R-Kansas, Rep. David Schweikert, R-Arizona, Darin LaHood, R-llinois, and Rep. Brad Wenstrup, R-Ohio — pointed out in Wednesday’s letter the IRS used its John Doe Summons authority to seek the records of approximately half a million Americans who held virtual currencies between 2013 and 2015. Then on July 2, 2018, the IRS’s Large Business and International division announced five new compliance campaigns, one of which focuses on non-compliance related to virtual currencies.

“At the same time, the IRS also announced that it would not be providing leniency for taxpayers by allowing for a voluntary disclosure program to address tax non-compliance related to virtual currencies,” they wrote. “The IRS has also sought to remind taxpayers of the penalties for non-compliance with its preliminary guidance. In March 2018, the IRS reminded taxpayers that those who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and held liable for penalties and interest. In more extreme situations, taxpayers can be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.”

Brady and his colleagues expressed concern about the IRS’s enforcement efforts in the absence of much guidance. “While the Committee appreciates the IRS’s need to undertake enforcement actions to ensure that taxpayers generally meet their tax obligations, in this case, we are concerned that the IRS is seeking to enforce guidance that does not adequately advise taxpayers of their tax obligations when using virtual currencies,” they wrote. “Furthermore, while the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS’s duties as the nation’s tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them. A failure to put forth adequate guidance severely hinders taxpayers’ ability to do so. The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.”

They noted that the Association of International Certified Professional Accountants, the American Bar Association and other organizations have all raised concerns, citing the need for additional clarity through updated guidance.

“We therefore strongly urge the IRS to expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies,” said the lawmakers. “In addition, we will be asking the Government Accountability Office to undertake an audit on this matter.”