Cryptocurrency traders in the United States have received overwhelming letters from the tax authority, the authority suspect cases of tax evasion from some traders. The agency is preparing new guidance notes to guide the collection of taxes going forward.
Traders in the United States await new tax guidelines from the tax authority in the wake of the warning letters, and these guidelines will be the first since 2014. However, it is yet unclear what these guidelines would be, and the only option that traders now have is to wait and see. IRS, in a statement a few months ago informed that the instructions would be out before the end of May. The deadline is long overdue, and now we are heading to September.
While IRS failed to fulfill its promise of delivering tax guidelines by May, last month, it sent over 10000 letters to traders asking them to update and fill details under penalty and perjury clearly stating their tax status regardless. From the warning letters, the tax authority in a way wants to change the asset class of crypto gains.
To have a broader outlook, when looking at the warning letters keenly, it instructs the traders to compute the market value of cryptocurrency holdings differently. Further, the traders are to take into account the exact moment they made a transaction in the past, be it a sell or a purchase of a cryptocurrency, and this is in a way different from the 2014 regulations that only required traders to use the exchange rates appropriately and pick one price that the cryptocurrency traded during the day.
How do the Regulations Work
If a trader bought five bitcoins about four years ago, the 2014 guidelines in place then would require the trader to randomly take any value of bitcoin during the day and use it to calculate the fair market value. Therefore, if Bitcoin opened at $243.069, then dipped to $232.77 during the day, and rose to $236.07 at closing, any of these values could be considered to calculate the fair market value by the trader.
The warning letters, however, require you to remember the moment you purchased the 5 Bitcoin and use the price value of the coin at the time of purchase to calculate the market value.
The biggest issue here, Sean Ryan claims will be finding this information, especially for regular traders as the letters demand full taxes on all transactions between 2013 and 2019.
Other than that, the letters also advocate for different ways to collect information about traders, as the past ones were a bit confusing, as many traders never really receive any income through exchanges, but utilized the exchange agencies to buy cryptocurrencies. Further, the information contained in the 1099-k forms is usually untrue most of the time. Also, the letters noted that ” if you sold, or disposed of virtual currency (e.g., Bitcoin,), or used it to pay for goods and services, you have engaged in a reportable transaction.”
People who received the letters did so probably because the IRS has tangible evidence they made a transaction within the period.