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Archive for Cryptocurrency

Cryptocurrency Investors Turn To Opportunity Zones For Tax Relief

Cryptocurrency Investors Turn To Opportunity Zones For Tax Relief

Whether you consider cryptocurrency an investment, a commodity, an alternative banking system or a form of legalized gambling, the rapid adoption and stunning recent volatility of cryptocurrencies has led to frenetic trading by investors. As a result of COVID-19 disruption, economic uncertainty and the entry of PayPal into the crypto-consumer market (allowing more than 300 million users to buy cryptocurrencies easily), the crypto market has seen a dramatic runup in the values of Bitcoin and many other cryptocurrencies.

Speculative crypto trading (as well as day trading of stocks) has made many crypto investors wealthy on paper. Their trading generated a substantial amount of short-term capital gains. The IRS has made it clear that Bitcoin and other cryptocurrencies should be treated as assets or intangible property — and not currency — since it is not issued by a central bank. This results in taxability virtually every time crypto is transferred or liquidated.

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Court Authorizes Service Of John Doe Summons Seeking Identities Of U.S. Taxpayers Who Have Used Cryptocurrency

Court Authorizes Service Of John Doe Summons Seeking Identities Of U.S. Taxpayers Who Have Used Cryptocurrency

A federal court in the Northern District of California entered an order today authorizing the IRS to serve a John Doe summons on Payward Ventures Inc., and Subsidiaries d/b/a Kraken (Kraken) seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Kraken, a digital currency exchanger headquartered in San Francisco, California.

“Gathering the information in the summons approved today is an important step to ensure cryptocurrency owners are following the tax laws,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer.”

“There is no excuse for taxpayers continuing to fail to report the income earned and taxes due from virtual currency transactions,” said IRS Commissioner Chuck Rettig. “This John Doe summons is part of our effort to uncover those who are trying to skirt reporting and avoid paying their fair share.”

Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudoanonymous aspect, taxpayers may be using them to hide taxable income from the IRS. On April 1, 2021, a federal court in the District of Massachusetts granted an order authorizing the IRS to serve a similar John Doe summons on Circle, a digital currency exchange headquartered in Boston.

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Can My Business Accept Cryptocurrency?

Can My Business Accept Cryptocurrency?

How Blockchain Payment Technology Is Infiltrating Core Business Practices And Ways We Can Maintain Tax Compliance With Its Use

Written by Allyn Tax Author Eleene Ismail

Cryptocurrency is a decentralized, digital form of currency that is designed to work as an alternative payment medium based on quickly emerging blockchain technology. Although there are over 5,000 different cryptocurrencies in circulation, Bitcoin is the most popular among these digital currencies and is the fastest growing one to date considering the volume of trading and price valuation increases. Based on such characteristics cryptocurrency is seen as an investment capital asset, more akin to corporate stocks, rather than as a form of legal tender. This perspective shifted in recent weeks as large corporations including Tesla, MasterCard, Home Depot, AT&T, and BNY Mellon are making strides to accept Bitcoin as a payment option for their goods and services.

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

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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Can You Go To Jail For Failing To Disclose Virtual Currency On A Tax Return Or As Part Of An Offer For A Collection Alternative?

Virtual currency, such as Bitcoin, continues to be a topic of interest for the IRS. Indeed, for the 2019 tax year, the IRS added for the first time a unique question to Schedule 1, Additional Income and Adjustments to Income, which asks: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.” After the question, the taxpayer is required to check either “yes” or “no.” Predictably, there is no “maybe” box. Continuing with this theme, the IRS now intends to ask even more Americans the same question for the 2020 tax year. That is, the same question above will now be asked on Page 1 of the Form 1040, U.S. Individual Income Tax Return. Because more Americans file Form 1040 than Schedule 1, the IRS’ intentions are clear—it intends to continue to seek more information regarding taxpayers’ holdings and dealings in cryptocurrency. Notably, taxpayers who seek to offer collection alternatives to the IRS are also not immune. On the Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, it specifically requests the taxpayer to “[l]ist all virtual currency you own or in which you have a financial interest (e.g., Bitcoin, Ethereum, Litecoin, Ripple, etc.) If applicable, attach a statement with each virtual currency’s public key.” In light of all these developments, a common question I receive from clients is whether someone can actually go to jail for checking the box “no” where, in fact, he or she should have checked the box “yes.” The answer is: YES. Criminal Tax Laws. There are a host of criminal tax provisions enacted and designed to keep taxpayers honest with their tax filings. For example, Section 7201 makes it a felony for any person to willfully attempt in any manner to evade or defeat tax imposed under the Internal Revenue Code (e.g., Title 26) or any payment thereof. Thus, to maintain a successful conviction under Section 7201, the government must show: (1) willfulness; (2) the existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. See, e.g., U.S. v. Bolton, 908 F.3d 75, 89 (5th Cir. 2018). Generally, the statute’s terminology of “in any manner” has been construed broadly by the federal courts. See U.S. v. Daniels, 699 Fed. Appx. 469, 473 (6th Cir. 2017 (citing Spies v. U.S., 317 U.S. 492, 499 (1943)). Accordingly, false statements or the concealing of assets from the IRS can constitute criminal conduct under Section 7201. See U.S. v. Shoppert, 362 F.3d 451 (8thCir. 2004); U.S. v. McGill, 964 F.2d 222 (3d Cir. 1992). In line with these cases, the government could conceivably choose to go after a taxpayer under Section 7201 for the failure to properly check the box “yes” with respect to the cryptocurrency question now listed on the federal tax return. In addition, there is another criminal statute the government could use. Specifically, Section 7206(1) makes it a felony for any person to willfully make and subscribe any return, statement, or other document, which contains or is verified by a written declaration that is made under penalties of perjury, and which such person does not believe to be true and correct as to every material matter. Unlike a Section 7201 conviction, however, the government is not required to show the existence or proof a tax deficiency under Section 7206(1). U.S. v. Wilson, 887 F.2d 69 (5th Cir. 1989). But any measure of tax harm would of course remain significant for purposes of determining potential sentencing of the taxpayer under the Sentencing Guidelines. The government has utilized Section 7206(1) successfully in the past to obtain convictions against taxpayers who falsified answers to certain parts of a tax return. For example, federal courts have held that providing false answers to the questions at the bottom of Schedule B, Interest and Ordinary Dividends, concerning interests in foreign financial accounts or foreign trusts violates Section 7206(1). U.S. v. Clines, 985 F.2d 578 (4th Cir. 1992); U.S. v. Franks, 723 F.2d 1482 (10th Cir. 1983). Moreover, because Section 7206(1) applies to not only tax returns but also any “statement . . . or other document,” the government has successfully used Section 7206(1) to prosecute taxpayers who provide false answers to questions on IRS Form 433-A or IRS Form 656, Offer in Compromise. See U.S. v. Holroyd, 732 F.2d 1122, 1127-28 (2d Cir. 1984); U.S. v. Cohen, 544 F.2d 781 (5th Cir. 1975). Finally, the government can also use Section 7206(5) to prosecute taxpayers who provide false answers specifically to offers in compromise. See Gentsil v. U.S., 326 F.2d 243 (1st Cir. 1962) (charging Section 7206(5) for false OIC). Parting Thoughts. With the IRS’ increased focus on cryptocurrency, taxpayers should be aware that statements made on a tax return and/or collection-type forms may be used against them in a criminal prosecution. Accordingly, taxpayers should be careful in answering any and all virtual cryptocurrency questions on these forms.

Virtual currency, such as Bitcoin, continues to be a topic of interest for the IRS.  Indeed, for the 2019 tax year, the IRS added for the first time a unique question to Schedule 1, Additional Income and Adjustments to Income, which asks:  “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”  After the question, the taxpayer is required to check either “yes” or “no.”  Predictably, there is no “maybe” box.

Continuing with this theme, the IRS now intends to ask even more Americans the same question for the 2020 tax year.  That is, the same question above will now be asked on Page 1 of the Form 1040, U.S. Individual Income Tax Return.  Because more Americans file Form 1040 than Schedule 1, the IRS’ intentions are clear—it intends to continue to seek more information regarding taxpayers’ holdings and dealings in cryptocurrency.

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The United States’ Need To Reevaluate Legislation On International Cybercrime To Successfully Compel Forfeiture of Digital Assets Abroad

The United States’ Need To Reevaluate Legislation On International Cybercrime To Successfully Compel Forfeiture of Digital Assets Abroad

Four United States government agencies collaborated in an investigation of North Korean hackers who targeted and stole over $250 million worth of various cryptocurrencies from two South Korean cryptocurrency exchanges in July 2019 and March 2020.[1] A civil in rem forfeiture complaint filed on behalf of the United States on August 27th, 2020 seeks the forfeiture of 280 virtual currency accounts belonging to the hackers. Although the techniques used by the agencies to trace the stolen funds is impressive, the task of seizing the assets still remains and presents a unique problem.

The issue for seizing the cryptocurrency wallets involves two elements. First, seizing cryptocurrency abroad requires multiple legal hurdles to clear. Second, the property belongs to a country with tense political relations to the United States. The government is faced with the issue of enforcing a forfeiture against an almost untouchable entity.

The Attack & Investigation

The American agencies utilized a U.N. report by the U.N.’s Security Council to suspect North Korean hackers as masterminds of the attack.[2] North Korean hackers previously attacked South Korean crypto exchanges to fund their regime’s weapons development program.[3] With this information, the agencies used advanced tracing techniques to obtain and track the hacker’s transactions, wallet addresses, clusters on the blockchain, email and exchange accounts, and VPN addresses to confirm North Korean hackers were indeed behind the attack.

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

Recent 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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Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Cryptocurrency And IRS

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

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Five Myths About Cryptocurrency Taxation

Myth No. 1

There is no need to report any gain or loss for exchanges between one cryptocurrency and another if the transaction occurred before January 1, 2018. That is not true. Every time when you sell a cryptocurrency, whether for fiat currency or another cryptocurrency (e.g. sell Bitcoin for Ethereum), you need to report the transaction and calculate gain or loss for tax purposes. Many people thought an exchange between two cryptocurrencies qualified for section 1031 like-kind exchange if it was done before January 1, 2018. Under the new tax law signed by the President on December 22, 2017, only real property qualifies for section 1031 like-kind exchange tax treatment starting 1/1/2018. However, it does not mean that cryptocurrency qualified for like-kind exchange tax treatment before the new law kicks in. There is no tax law, old or new, supports the conclusion that cryptocurrency ever qualified for like-kind exchange tax treatment. People taking such position are at risk for losing their battle with IRS.

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What Does Trading Cryptocurrency Daily Mean For My Taxes?

Cryptocurrency and Taxes

From a technical perspective cryptocurrency is very easy to trade. Sign up to an exchange, deposit some fiat currency, and with just a couple of clicks one can become the new owner of some Bitcoin, Ethereum, or another coin that has taken the world of digital investments by storm. But while cryptocurrency may be easy to acquire, did you know it’s a terrible headache to deal with tax-wise?

It’s true! And this applies especially to cryptocurrency transactions you make frequently. Whether buying, selling, or exchange (trading one crypto for another), when investing in crypto beyond there are a number of factors you really need to keep in mind, especially with the IRS’s new interest in it.

Understand Cryptocurrency

Cryptocurrency is treated as property. This means any profits you make are treated as a capital gain. While your currency may be innovative and digital, the IRS approach to it is historic and old school. You made money from the growth of value in a financial asset, and upon such time as the value of the asset is realized, the government will expect a cut of the profit.

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Is Bitcoin Money?

What is money? Money is a measurement unit for the purpose of exchange. Money is used for valuation of goods, settling debts, accounting for work performed, and standardizing the measurement of production. Money has to be divisible, portable, stable in value, easy to obtain, durable over time and must be trusted by all parties using it.

Imagine money that is too large to divide into pieces, heavy to carry, spoils after 2 days, gets damaged easily or can be eaten by animals? If these are the characteristics of the currency, it would not be that useful and many business deals would not happen.

The most important element of money is trust. If you work for someone and you are not sure if you will get paid, would you do the work? If you did the work, and you got paid for something that was not accepted in many places, is it a valid payment? The economy and money system are built on trust, and it can be broken by a lack of trust by the majority of people.

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Is Bitcoin The De Facto Reserve Cryptocurrency?

What is a reserve currency? This is the currency in which all other currencies are standardized against, and this measure is used for global trade, asset valuation, and account settlement. The current reserve currency is the U.S. dollar since it was the strongest currency after World War 2. The strength of the currency was based on its trade position, political influence, military might, resources available and liquidity/recognition in the investment world.

In the cryptocurrency world, Bitcoin serves this function as other cryptocurrencies are converted into Bitcoin to access most exchanges. Since Bitcoin has the brand recognition of being the first known cryptocurrency, it has the advantage of breaking milestones first.

Bitcoin was the largest cryptocurrency by market cap at the time of writing (January 2018), the first coin to be created in 2009 and the first currency to be utilized for futures trading around the world. Bitcoin is also the first decentralized currency in recent time, as there have been digital and electronic currencies created before and after Bitcoin that are not decentralized.

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