Digital Assets | TaxConnections

12 Apr 2024

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

The Treasury Inspector General for Tax Administration (“TITGA”) recently has released a report on the status of efforts by the Internal Revenue Service (“IRS”) to develop the digital asset monitoring and compliance strategy mandated by Congress with the Inflation Reduction Act of 2022.

For purposes of federal taxation, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[1] This includes non-fungible tokens and virtual currencies.

As part of the Infrastructure Investment and Jobs Act of 2021, Congress had amended sections 6045 and 6050I to require reports from digital asset brokers and from any person engaged in non-financial trades or business who receives more than $10,000 at least in part in digital assets.[2]

TITGA noted that the IRS has created the Digital Asset Advisory Committee (“DAAC”) in February 2022 to provide service-wide collaboration, planning, and information sharing with respect to digital assets. The DAAC has the following goals:

Coordinating collaboration, planning, information sharing, and executive leadership over the IRS’s digital asset strategy related to its compliance programs.
Identifying and monitoring the management of digital asset programs and resources to ensure accountability, transparency, and consistency.
Recommending funding and investment opportunities for digital asset technology and operational needs such as tracing software, or basis computational tools.
Reviewing digital asset related activities, as needed.

Written by TL Fahring | Posted in Digital Assets • TIGTA

28 Nov 2023

When Can You Deduct Digital Asset Investment Losses On Your Individual Tax Return?

How To Deduct Losses On Virtual Currency, Cryptocurrency And Non-

Fungible Tokens

In the current digital asset climate of plummeting values, frozen accounts, and bankruptcy filings, if you own investments in digital assets, such as virtual currency, cryptocurrency and/or non-fungible tokens (NFTs), you might wonder when it is appropriate to report losses on your tax return.

The IRS considers digital assets to be property. The tax treatment of a digital asset transaction depends on the purpose of the digital asset in your hands. If you held or are holding digital assets as investments, the digital assets are considered capital assets and certain tax rules apply when determining gains and losses from these investments. (Note: This Tax Tip only addresses digital assets held for investment. If you held digital assets for a reason other than investment purposes, see IRS Publication 544, Sales and Other Dispositions of Assets, and IRS Notice 2014-21 for more information.)

Sales

If you sold the digital asset you held as an investment for less than your cost to purchase it, you have a capital loss. First, you will need to determine if your capital loss is a short-term loss or a long-term loss (use IRS Publication 544, Sales and Other Dispositions of Assets, to help you make this determination). Then use Form 8949 to calculate your capital gain or loss and report that gain or loss on Schedule D (Form 1040). If you exchanged your digital asset investment for property (including a different digital asset) other than cash, you will first need to value the property you received on the date of the transaction. For example, if the value is greater than your cost in the digital asset you gave up, then you have a capital loss, which you will report on Form 8949.

Bankruptcy and Frozen Accounts

How should you report your digital asset investment loss when it is worthless, near worthless, locked in bankruptcy proceedings, or has vanished?

Read More

Written by National Taxpayer Advocate | Posted in Digital Asset Investment Losses • Digital Assets

15 Nov 2022

Risk Of Holding Digital Assets Through Custodial Wallets

Non-Custodial Wallets v. Custodial Wallets: Considerations for Holding Digital Assets

Introduction: The FTX Collapse, Custodial Wallets, and Bankruptcy Concerns

The recent headlines regarding cryptocurrency exchange FTX’s collapse, and subsequent bankruptcy filing have put renewed focus on whether customers of a cryptocurrency exchange should hold digital assets through a custodial wallet. When a customer holds digital assets through a custodial wallet the service provider holds both the public key and the private key and effectively has control over the assets. The issue for cryptocurrency exchange customers is if a cryptocurrency exchange files for bankruptcy protection are the customers’ digital assets property of the exchange’s bankruptcy estate and available to be used to satisfy debts of other creditors? Bankruptcies involving cryptocurrency exchanges or cryptocurrency lending platforms is a developing area of the law and presents issues of first impression. Recent cryptocurrency bankruptcies include Voyager Digital LLC, Celsius Network LLC, and most recently FTX Trading Ltd. If customers of a cryptocurrency exchange or cryptocurrency lending platform hold their digital assets in a custodial wallet, rather than a non-custodial wallet (i.e., a private wallet), it may increase the risk that such assets are treated as corporate assets of the exchange or lending platform.

Risks of Holding Digital Assets in a Custodial Wallet

Written by Andrew Mirisis | Posted in Cryptocurrency • Digital Assets

19 Oct 2022

White House Releases First-Ever Comprehensive Framework For Responsible Development Of Digital Assets

Bidens Executive Order On Digital Assets

Following the President’s Executive Order, New Reports Outline Recommendations to Protect Consumers, Investors, Businesses, Financial Stability, National Security, and the Environment

The digital assets market has grown significantly in recent years. Millions of people globally, including 16% of adult Americans, have purchased digital assets—which reached a market capitalization of $3 trillion globally last November. Digital assets present potential opportunities to reinforce U.S. leadership in the global financial system and remain at the technological frontier. But they also pose real risks as evidenced by recent events in crypto markets. The May crash of a so-called stablecoin and the subsequent wave of insolvencies wiped out over $600 billion of investor and consumer funds.

President Biden’s March 9 Executive Order (EO) on Ensuring Responsible Development of Digital Assets outlined the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. Over the past six months, agencies across the government have worked together to develop frameworks and policy recommendations that advance the six key priorities identified in the EO: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Written by TaxConnections Admin | Posted in Digital Assets • White House Executive Orders

15 Mar 2022

Biden Signs New Executive Order On Digital Assets

Biden Signs Executive Order On Digital Assets

According to the White House, an Executive Order released by President Biden on March 9, 2022 Outlines First Whole-of-Government Strategy to Protect Consumers, Financial Stability, National Security, and Address Climate Risks.

Digital assets, including cryptocurrencies, have seen explosive growth in recent years, surpassing a $3 trillion market cap last November and up from $14 billion just five years prior. Surveys suggest that around 16 percent of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies. Over 100 countries are exploring or piloting Central Bank Digital Currencies (CBDCs), a digital form of a country’s sovereign currency.

Written by TaxConnections Admin | Posted in Digital Assets • President's Executive Orders

01 Dec 2021

New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill after months of negotiations. Tucked away within the sweeping legislation are measures that would extend Form 1099-B and cost basis reporting requirements to so-called “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, could impose onerous tax reporting obligations on crypto miners, software developers, and other players in the industry that may not have the resources or capabilities to report user transactions.

The Proposed Reporting Requirements

Under the Senate bill, starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities,” meaning brokers would need to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Under the bill, brokers would also be required to report transfers of digital assets to non-brokers. For purposes of the new requirement, digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This expansive definition would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.

Written by Jason Freeman | Posted in Cryptocurrency • Digital Assets • Form 1099-B