Among the many areas of law that will have to continue to evolve around cryptocurrencies is the tax law. In the United States, as far back as 2014, the Internal Revenue Service issued Notice 2014-21 which clearly stated that virtual currency is treated as property for U.S. federal tax purposes. That meant, among other things that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Employers must convert the cryptocurrency value to U.S. dollars as of the date each payment is made and keep careful records.
- Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
But some issues are probably not as easily answered. For example, it is fairly typical for cryptocurrency owners to trade one for another (e.g., ether for Bitcoin). Must the gains be paid on that transaction or might it be subject the rules on a “like kind exchange”? What about hard forks? Bitcoin cash was created in the summer of 2017 through a hard fork. Anybody who owned Bitcoin before the fork ended up owning both Bitcoin and Bitcoin cash afterwards. Should that be treated like a stock split?
It is reasonable to assume that the IRS will try to make certain that it gets its appropriate share of the wild gains made by many in cryptocurrency trading in 2017. Indeed, back in 2017, as reported in Techcrunch, a federal judge in California ordered Coinbase to turn over account information for more than 10,000 accounts.
Likewise, Reuters reported the other day that authorities in India had found that investors there were not reporting the capital gains on their cryptocurrency sales. The government therefore sent tax notices to tens of thousands of people.
