Blockchain technology and cryptocurrencies are natural partners, with decentralized control mechanisms and distributed models that emphasize secrecy as much as they offer privacy or security.
For IRS, secrecy is a problem. More precisely, it is an opportunity for lost profit. In an attempt to collect taxes on the boom in encrypted commerce, the agency has already shown a willingness to impose tax encryption platforms. How exactly the IRS will do it, however, remains a question that only the agency itself can answer. And it does not have – yet.
Cryptocurrencies: from tax haven to mainstream business
The cryptocurrencies, in large part, began when some investors wanted to create money that no central bank could control and no government agency could tax. The blockchain has, for the most part, allowed the crypto investors to fly under the regulatory radar. With virtual coins counted in the blockchain around the world and without a dominant authority to check their value or monitor transactions, cryptocurrencies seemed like a potential tax haven.
Or they did, at least, until IRS forced a large encryption platform last year to reveal high volume transactions to users through a "John Doe" call. The move demonstrated a desire by the IRS to derive revenue from previously protected cryptographic transactions. Thus, the Securities and Exchange Commission has requested digital asset trading platforms that meet the definition of a security, including cryptocurrencies, to register as national security platforms. The move exerted further pressure on the market to comply with current IRS regulations and make informed forecasts about the future direction.
Obscure regulations for encryption reporting 1099 – per hour
One method that IRS uses to impose taxation is to require companies to report taxable transactions or deal with financial sanctions. The law on tax cuts and work (TCJA), approved at the beginning of 2018, opened the door to the IRS to expand the taxation of cryptographic activities. In the TCJA, gentle type exchanges are now clearly limited only to real properties, thus closing cryptocurrency exchanges with similar treatments.
But the regulations concerning tax information reporting encrypted transactions are still a bit confused. The language is ambiguous and the specific reporting requirements are not clear. The IRS promises to offer clarity, but the timing of any new information is still uncertain. The IRS notice 2014-21, now four years old, is still the only indication on the encrypted taxation that the agency has ever issued and the document is neither complete nor final.
The new head of the agency says that there is more on Crypto. Charles Rettig, Commissioner of IRS, promised in mid-November that "the IRS will have more information on [crypto] than you can ever imagine " Tax notes reported, and suggested to the followers of the crypt "to pay attention to informal guidance as if it were a formal guide".
However, Rettig did not offer a date for when the IRS could issue indications of any kind, and the Priority Priority Plan 2018-2019, established by the Treasury Department and the IRS, does not mention cryptography at all.
Obscure rules and bizarre laws lead to lost tax revenues
Hence, while the IRS has shown that it intends to apply the existing 1099 reporting rules, it has not followed up providing clarity on these rules. For example, trading platforms may have to send 1099-B forms to users who exchange one type of currency with another, but are not explicitly obliged to send forms such as brokers for securities trading. In general, the 1099-B requirements remain unclear for cryptocurrencies.
The IRS has already forced a cryptocurrency exchange to bring users back to the 1099-K form, the same form of home sharing and traffic sharing companies use to report transactions with homeowners and drivers. However, the federal reporting threshold for 1099-K is currently set at $ 20,000 and 200 transactions per year. This would leave the cryptographic platforms out of trouble for reporting the overwhelming majority of their investors' transactions. Furthermore, 1099-K does not have the basic details of the costs involved in acquiring the capital gain / loss calculation that would ultimately result in taxable income and tax revenue for the IRS.
Cryptographic platforms still need to prepare changes to IRS rules
For now, all cryptographic platforms can pay attention to the 2014-21 ban, which remains closest to the regulation on the taxation of what the industry has, and to prepare as much as possible the planned regulations. This means establishing a kind of system to automate 1099 reports and ensure compliance now and in the future.
Doing nothing is not an option. IRS financial sanctions for non-compliance are low, with a maximum fine of almost $ 3.3 million for late or incorrectly filed forms. By "intentional disregard" of the reporting regulations, there is no maximum fine and the penalty is $ 530 per module, compared to $ 270 for late or incorrect. The IRS is not afraid to collect the fines and has sent a warning to the crypto platforms with the citation of the last year.
Blockchain and Crypto could fit together, but they can not escape the IRS. Although no one outside the IRS office is exactly sure how, one thing is certain that the IRS is coming for encrypted tax receipts. Platforms and investors do not know where to hide.
Paul Banker is general manager of Sovos, a software provider that safeguards businesses against the burden and risk of modern taxes.