ALERT: Momentum For Digital Dollars And Tax Expertise

On June 30, 2020 the US Senate Committee On Banking, Housing And Urban Affairs heard the testimony of the Chris Giancarlo. Mr. Giancarlo formerly served as Chairman of the US Commodity Futures Trading Commission and now is Founder of the Digital Dollar Project. He made three important observations ‘”you should read” in his testimony to the US Senate:

1) America’s financial infrastructure has fallen behind times

2) The world is entering an era when things of value, such as money, contracts, stock certificates, land records, cultural assets like art and music, our votes and even our personal identities will be managed and stored in a secure way. While the first wave of the internet is known as the Internet Of Information, the new wave is called the Internet Of Value.

3) The third observation is that, unless we act, this coming wave of the Internet will place an enormous strain on our aged, centralized financial systems. If we do act, however, we can harness this wave of innovation for greater financial inclusion, capital and operational efficiency and economic growth for generations to come.

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IRS Cryptocurrency Memorandum: Surprise, Surprise, It’s Still Taxable

As tax time approaches for many, taxpayers and tax professionals alike are engaging in the annual ritual of gathering their cryptocurrency transactions and seeking out the latest and greatest guidance from the IRS on the subject.  As luck would have it, the IRS recently released an internal memorandum fleshing out its stance on the taxation of virtual currency received in exchange for providing services.  The memorandum describes the taxation of virtual currency received in the “crowdsourcing labor market”—for example, for performing microtasks or other projects—but its principles are applicable much more broadly.

The IRS memorandum was quietly made public on August 28.  It is a reminder that the IRS continues to receive requests for additional cryptocurrency tax guidance.  In the memorandum, the IRS lays out its view that convertible virtual currency is “property” for federal tax purposes, and that its receipt in exchange for performing services gives rise to gross income.  But let’s look a little deeper at the IRS’s reasoning.  For starters, the IRS memorandum poses the following question:

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Bare Bitcoins — No Fourth Amendment Privacy In Virtual Currency Records

Virtual currency has been around for a number of years now, and yet many still believe virtual currency transactions provide a level of anonymity and privacy not afforded by other types of monetary transactions. That simply isn’t true. With the right tools and understanding, it is possible to uncover the identities of virtual currency users. Moreover, virtual currency has led to the evolution of financial regulations, tax regulations, and legal regulations. In July, the Fifth Circuit dealt with whether Bitcoin users had certain Fourth Amendment protections from unreasonable searches and seizures. In short, they do not.

Bitcoin Transactions, Generally

Virtual currencies may take many forms, but the “Bitcoin” is perhaps the most well-known. Furthermore, Bitcoin transactions function in a very specific way. Bitcoin users maintain an “address,” which is a string of alphanumeric characters, much like a bank account number. A company or organization may form multiple addresses and combine them into a separate, centralized address, known as a “cluster.”

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Letter From IRS On Digital Currency

Reporting Virtual Currency Transactions

Have You Received This Letter From The IRS Recently?

Dear [Name]:
Why we’re writing to you. We have information that you have or had one or more accounts containing virtual currency and may not have
met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.

Virtual currency is considered property for federal income tax purposes. Generally, U.S. taxpayers must report all sales, exchanges, and other dispositions of virtual currency. An exchange of a virtual currency (such as Bitcoin, Ether, etc.) includes the use of the virtual currency to pay for goods, services, or other property,
including another virtual currency such as exchanging Bitcoin for Ether. This obligation applies regardless of whether the account is held in the U.S. or abroad. More information can be found on www.irs.gov and in Notice 2014-21, found at www.irs.gov/pub/irs-drop/n-14-21.pdf, which describes how general tax principles
for property transactions apply to transactions using virtual currency.
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What You Need To Know About Virtual Currency

You’re probably familiar with the common question, “Cash or card?” However, over the last decade, a newcomer has entered the race. Virtual currencies, and its subset “cryptocurrencies,” which use cryptography to validate and secure transactions, have exploded onto the scene, offering a brand-new avenue for commerce.

However, similar to the lack of consistency among economic nexus and marketplace facilitator laws, legislation concerning virtual currencies also varies wildly state to state.

A Brief History of Virtual Currency

While most people have at least heard of them at this point, there is still a great deal of confusion regarding virtual currencies, how they work and what exactly they are.

Bitcoin is the most popular form of virtual currency, first introduced in 2009 and valued for the first time in 2010.

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Virtual Currency Gains Prominence On 2020 Tax Return

The 2019 Schedule 1 (Form 1040), Additional Income and Adjustments to Income, included a new question at the start of the form:

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”

On August 18, 2020, the IRS released the draft 1040 for 2020 and it shows this question has moved to page 1 of Form 1040 right below where you put your name and address.

For 2019, this seemed like an odd question since few individuals out of 150 million have any virtual currency (11% per a 2019 article by CoinTelegraph), and there are better questions to ask that affect far more people and potential income. For example, why not ask: ”Did you receive any funds from any web-based or Internet-based activity?”

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