The U.S. Treasury Department faces a complex task in enforcing its proposed digital asset reporting rules on foreign trading platforms. The regulations, introduced in late August, primarily address domestic transactions, leaving potential difficulties in enforcing reporting requirements on foreign digital asset brokers, especially those operating cryptocurrency trading platforms.
One potential avenue for the Treasury to
On September 8, 2023, the IRS announced a multitude of compliance initiatives aimed at high-income taxpayers, partnerships, digital assets, FBARs and labor brokers. According to the announcement, the IRS has finalized its “top-to-bottom review” of current enforcement efforts and intends to zero in on these matters in the near future. As expected, the impetus for change—according to the announcement—was Congress’s decision to provide the IRS with additional funding through its passage of the Inflation Reduction Act (IRA).
Providers of digital asset services would be subjected to tax reporting regulations akin to those governing brokers of securities and analogous financial instruments, as outlined in the inaugural set of proposed regulations delineating protocols for assets like cryptocurrency and nonfungible tokens. These guidelines, disseminated by the Internal Revenue Service on Friday, introduce the requirement for digital asset brokers to submit information returns and payee statements relating to asset sales conducted on behalf of customers during specific transactions, in accordance with Internal Revenue Code Section 6045.
Additionally, the comprehensive 282-page proposal recommended that brokers incorporate gain or loss details and basis information for sales occurring on or after January 1, 2026, under specific circumstances. This provision is designed to equip customers with the requisite information for compiling their tax returns.
The effective date of these regulations is slated for transactions from the preceding year, with enforcement beginning in 2026.
Law360 covered the topic in an article on August 25, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.
The Foreign Account Tax Compliance Act (FATCA) has resulted in a massive influx of financial information to the IRS over the past 13 years, but the extent of this data remains unknown. Despite expectations of significant revenue, FATCA has not met its financial goals, and the IRS is grappling with the challenge of effectively utilizing the data it has received from partner jurisdictions to enforce tax compliance. Tax Notes covered the topic in an article on August 23, 2023. Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.
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Some of the funding will be used to help narrow the field of taxpayers potentially selected for audit, as the agency has been given a mandate to go after wealthy taxpayers, said Joshua D. Smeltzer of Gray Reed. “It will be difficult to target improvements in enforcement directly to FATCA because . . . dissecting enforcement increases on a granular level is just too hard,” Smeltzer said. However, because many more taxpayers in middle- and high-income brackets have worldwide finances, “the efforts by the IRS for FATCA enforcement will increase as well,” he said.
UPDATE: On August 15, 2022, Judge Otis D. Write II in the Central District of California entered an order approving service of the summons by the IRS on sFOX for account and transaction records. The Department of Justice entered a press release the following day with Commissioner Chuck Rettig quoted as saying “the John Doe Summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats and this is yet one more example of that.” Deputy Assistant Attorney General David A. Hubbert of the Department of Justice Tax Division was also quoted as well saying “taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable.”
The IRS knows it has a problem, in that it knows there are far more cryptocurrency transactions than are being reported on tax returns. The IRS may also get an $80 billion increase in funding for enforcement that will help solve that problem. What can taxpayers and cryptocurrency service providers expect? More John Doe Summonses. If there was any doubt, the IRS filed two new John Doe Summons requests (here and here) this week on cryptocurrency service provider sFOX. sFOX is the full-service crypto prime dealer for institutional investors, providing brokerage services for digital assets. It’s also now a target for information by the IRS and the Department of Justice Tax Division.
Cryptocurrency is no longer a new asset — it’s been around since 2009 — and the number of individuals and businesses who own or use cryptocurrency and NFTs, and the underlying blockchain technology, continues to increase with each passing year. Remarkably, the U.S. and most other countries are still only beginning to regulate the taxation
Cryptocurrency holders often want to put their assets into an entity for a host of reasons, such as asset protection, arranging negotiated management rights and exit planning. This post discusses basic federal income tax issues related to holding cryptocurrency inside a partnership (meaning any entity taxed under Subchapter K* of the Internal Revenue Code; the “Code’).
Cryptocurrencies might, simplistically, be defined as virtual currencies that use cryptography to secure transactions which are digitally recorded on a widely distributed ledger. The ledger technology uses independent digital systems to timestamp and harmonize transactions. The cryptocurrencies associated with a ledger are often called “coins” or “tokens”.
Cryptocurrency can be acquired in multiple ways. This post covers only common methods, such as purchase, gift, or airdrop following a hard fork. A hard fork occurs when a ledger is subject to modifications that “break” compatibility with an earlier protocol; in other words, each leg of the fork follows different “rules” so the blockchain ledger is split into an original chain and new chain. Hard forks sometimes result in the creation of a new cryptocurrency. An airdrop is a method of distributing cryptocurrency units to the ledger addresses of individual taxpayers. Airdrops sometimes, but not always, follow hard forks. While blockchain technology is interesting, and an elementary understanding of its technological mechanics is useful, it is the tax consequences of the receipt and disposition of cryptocurrency which is the subject of this post.
Joshua Smeltzer was recently quoted by Law360 in an article on cryptocurrency enforcements:
“The John Doe summons is probably one of the most powerful tools the government has,” Joshua Smeltzer, counsel at Gray Reed, told Law360.
“Every time the IRS gets information from John Doe summonses, or from audits, or from the threatening letters that
One of the most powerful tools in the Internal Revenue Service arsenal is the John Doe summons. However, as we all learned from Spider-Man, with great power comes great responsibility.
Although it ultimately approved an IRS request to serve a summons for information on the popular cryptocurrency exchange Kraken Inc., the U.S. District Court for