IRS continues focus on cryptoassets.

• Author: Cotter, Tim

Along with most of the population, the IRS has been trying to figure out cryptoassets for more than a decade. In Notice 2014-21, the IRS describes cryptoassets--which it calls virtual currency--as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value," other than a representation of the U.S. dollar or a foreign currency. The IRS made clear in the notice that cryptoassets are property for tax purposes and that taxpayers have gain or loss upon an exchange of cryptoassets for other property.

Cryptocurrency is a type of crypto-asset that uses cryptography to secure transactions digitally recorded on a distributed ledger, such as a blockchain, in units typically referred to as coins or tokens. Income reporting issues arise with cryptoassets because of the lack of reporting requirements compared to, for instance, a traditional brokerage house that provides Forms 1099 for reporting income derived from those investments. Due to cryptoassets' largely unregulated nature and the lack of reporting, along with a continued growth in both users and market capitalization, the IRS has dramatically ramped up its focus on cryptoassets.

This item describes the Service's recent efforts to increase enforcement against taxpayers who fail to report income from transactions in cryptoassets.

Background

In frequently asked questions (FAQs) on its website, the IRS discusses a number of instances where a taxpayer will recognize income or loss from a cryptoasset transaction, including:

* Selling cryptoassets for real currency;

* Providing services and receiving cryptoassets as payment;

* Cryptoassets paid by an employer as remuneration for services constituting wages;

* Exchanging cryptoassets for other property or vice versa; and

* Cryptocurrencies going through a "hard fork" followed by an "airdrop" when the taxpayer receives new cryptocurrency (see also Chief Counsel Advice 202114020).

The IRS Criminal Investigation (CI) division has increased its initiatives to understand and properly address cryptoassets over the last several years. Interestingly, as cryptoassets have grown in popularity over the past decade, the IRS has noticed a negative correlation between the customer base listed on cryptoasset company websites and the number of taxpayers reporting income related to cryptoasset transactions on their income tax returns.

Use of John Doe summonses

The first IRS attempt at identifying cryptoasset...