With the introduction of cryptocurrencies as an asset class within the United States, taxation regulations are increasingly being criticised for being overly burdensome and complex for most users.
Although the US tax office has been more proactive than most in attempting provide more clarity about the regulatory treatment of cryptocurrencies, the Internal Revenue Service (IRS) continues to be criticised for avoiding the intricacies of compliance, and for failing to clearly describe the consequences of failing to comply where there is no clear path to compliance.
The new Schedule 1 to the IRS' Form 1040 currently asks whether ”you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”. This wording has been heavily criticised for its ambiguity, specifically the lack of guidance as to exactly what this means for taxpayers who have transacted with a "virtual currency" in a novel way, like through atomic swap protocols, airdrops, or on DeFi lending platforms.
Clinton Donnelly, known as the 'Crypto Tax Fixer' in the US, highlighted the regulatory void in assisting taxpayers declare accurately all their trading activities to the IRS. He said (emphasis added):
All US crypto exchanges will eventually be forced to comply with all banking and brokerage regulations, which means that at some point in the future, you’ll get a Form 1099-B just like you do from a brokerage statement, listing all your trades, what you bought it full circle. It’d be very easy for your tax returns. We are definitely not there yet.
Donnelly also highlighted that as more people begin to use or invest in digital assets, crypto and compliance processes will need to be streamlined drastically by US regulators.
A Bitwise survey suggests that around 45% of financial advisers are open to advising clients to invest in crypto-assets in 2020. Donnelly also noted:
A good crypto tax return involves not just general tax preparation skill. You have to have an accounting skill to do the reconciliation of all the trades, you also need to have the legal skills because the Anti-money laundering forms are very much law-oriented.
While the IRS should be commended for releasing further guidance in October 2019, there is clearly still some way to go.
As more people and businesses become familiar with digital assets, the lack of clarity on how the IRS considers digital assets will become more problematic in the long term, adversely affecting the industry and the users. Clarity for taxpayers is critical, and where possible clear and unambiguous guidance should be implemented to outline the steps taxpayers should take throughout the disclosure and compliance process.
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