IRS Issues Additional Guidance on Tax Treatment of Virtual Currency

The IRS recently issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS issued additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency, including Revenue Ruling 2019-24 and Frequently Asked Questions on Virtual Currency Transactions (FAQs).

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

The new guidance supplements the guidance the IRS issued on virtual currency in Notice 2014-21, and is soliciting public input on additional guidance in this area. In Notice 2014-21, the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes. The notice e explained, in the form of 16 FAQs, the application of general tax principles to the most common transactions involving virtual currency.

The IRS is aware that some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax, or did not report their transactions properly. The IRS is actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education to audits and criminal investigations.

For example, in July 2019, the IRS announced that it began mailing educational letters to more than 10,000 taxpayers who may have reported transactions involving virtual currency incorrectly or not at all. Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Editor’s note: For more information, review the content about IRS guidance on the Intuit Tax Pro Center.