On July 26, the Wall Street Journal reported that the Internal Revenue Service has mailed letters to over 10,000 cryptocurrency holders warning that those who fail to report income and pay tax on cryptocurrency transactions may be penalized. IRS Commissioner Chuck Rettig has stated that taxpayers should take the warnings “very seriously,” as the IRS is expanding its regulatory focus in this field.
Cryptocurrency is a form of virtual cash that allows payment to be sent online from one individual to another, while circumventing traditional financial institutions. Unlike paying online with a credit card or other traditional means of payment, cryptocurrency is based on underlying “blockchain” technology. Blockchain is a public ledger that records every cryptocurrency transaction. Blockchain in itself is often considered to be safer than traditional money transfers, because it can document, trace and verify the currency used in every transaction.
Cryptocurrency has been largely unregulated thus far because it is so unique, complex and difficult to define.
Cryptocurrency transfers are anonymous, so they are frequently used to fund illicit activities. However, cryptocurrency is also in finite supply, so it is often used as a form of investment property rather than as the virtual cash it was intended to be.
Thus far, it appears that the most prevalent legal use of cryptocurrency is as an investment, and the IRS has made clear that it intends to tax it as such. Further regulation from the IRS is certain, but details are yet to be released. If you currently hold cryptocurrency or have in the past, we encourage you to contact our office for up-to-date guidance regarding this dynamic new currency.
