Cryptocurrencies and taxes

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Publication August 9, 2018

Cryptocurrencies could come up in IRS audits.

The IRS launched a new taxpayer compliance campaign aimed at cryptocurrencies on July 2.

Cryptocurrencies are treated currently as property rather than currency for US tax purposes. (For more detail, see “Bitcoins” in the April 2014 NewsWire.) This means that anyone holding bitcoins, ethereum or other cryptocurrencies risks having to pay a tax on gain when the coins are used in the same manner as if the holder sold property and used the cash to buy goods or services. This makes it impractical for individuals and businesses to use such currencies for ordinary course transactions because of the need to track gains and losses.

Karl Walli, a lawyer in the office of tax policy at the US Treasury, told a New York State Bar Association tax section meeting in June that the Treasury has a growing list of issues with cryptocurrencies that need to be addressed. However, it has to make guidance on the new tax reforms that were enacted at the end of 2017 a priority this year.

Taxpayer compliance is low. Credit Karma Tax, a free on-line tax preparation service, reported that fewer than 100 of the 250,000 tax returns that it filed in January reported owning cryptocurrency for tax purposes, a far smaller percentage than the 7% of Americans that are believed to own such currencies, and only one reported a gain or loss despite the huge swings in bitcoin prices during 2017.

Money raised in initial coin offerings may be taxable upon receipt by start-up blockchain companies if the companies are viewed as selling property or prepaid services. This creates a timing issue because the blockchain platform is usually still under development. The costs to develop the platform are incurred over time. US companies are no longer able to carry back losses to offset income reported in the past after the tax reforms last December.

An investor who paid $25,000 in January for 208,333 Latium tokens, a new cryptocurrency, has sued the Latium founders, after the token value dropped to $10,000, on grounds that the initial coin offering was a sale of unregistered securities in violation of US securities laws. The suit was filed in early June in federal district court in New Jersey. The case is Solis v. Latium Network, Inc.

Meanwhile, WePower, an energy financing and trading platform that uses blockchain, went live in July. Conquista Solar, a solar developer, plans to use the platform to auction energy tokens for 20% of the output from six 50-megawatt solar plants that it plans to build in Spain, as a way of raising development capital for the projects. Bidders can resell the tokens rather than take delivery of the power.


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