IRS form 1040, modified by CoinDesk using PhotoMosh
Kirk Phillips is an entrepreneur, certified public accountant (CPA) and author of “The Ultimate Bitcoin Business Guide: For Entrepreneurs & Business Advisors.”
You need to be nimble to be a crypto tax professional. As the industry has evolved over the last few years, there have been many technology changes, and many changes in how the IRS treats crypto taxation issues.
Between 2014, when the IRS issued its first virtual currency notice, and 2019, when it published new , we saw all kinds of innovation requiring tax rethinks. Chain-splits, airdrops, token swaps, staking, DeFi yield farming, synthetic assets and more emerged in that period.
This explains why the AICPA (which represents accountants), the American Bar Association, and Coin Center have worked feverishly behind the scenes explaining to the IRS how “virtual currency events” should be taxed. As a member of the AICPA Virtual Currency Task Force, I’ve been fortunate to participate in these conversations and get a first hand view.
But, even today, it’s arguable whether we have greater clarity than before. Many tax professionals claim the recent guidance didn’t provide much clarity and created more confusion than it dispelled. For example, Rev. Rul. 2019-24 describes an “airdrop after a hard fork.” However these are independent and unrelated events, so professionals find it challenging to interpret the meaning and how to apply it.
This situation isn’t unique to crypto. Sometimes the IRS publishes final regulations more than a decade after taxpayers wish they were available. But it does make for unpredictable outcomes and forces individuals and businesses to file more in hope than expectation that they’ve acted correctly.
Even in a world where all taxpayers operate in good faith and make their best compliance efforts, they might take a completely different approach to the same scenario. For example, Taxpayer A arrives at a non-taxable or tax-deferred scenario while Taxpayer B concludes they have ordinary income, yet both were engaged in the same Virtual Currency Transaction X.
Tax positions are a game of risk management taking account the likelihood of audit, the strength of the position and amount of the tax liability, penalty and interest due if a taxpayer “loses the game.”
Risk management gets more complex when tax advisors are involved because their asses are on the line. There are more professional liability claims for tax services than any other service offered by CPAs. (Audit claims are higher in dollar value but lower in number.)
With this in mind, some tax preparers are undercharging for services and many taxpayers don’t understand how tax preparer risk is properly reflected in the price. Almost anyone can prepare taxes for hire and you don’t have to be a CPA. But like Robert Kiyosaki says, “free advice is the most expensive advice,” referring to people who like to get advice from an “expert friend.”
Tax compliance and tax reporting are a collaborative dance between taxpayer and tax advisor. A taxpayer may prefer a more aggressive tax position, but both the taxpayer and tax advisor are simultaneously on the hook, albeit in different ways. Both parties have to come to and be comfortable with their consensus. Just add in crypto and the process becomes more challenging.
What we’ve seen since the IRS’s 2014 Notice makes it easy to conclude there’ll be a larger cornucopia of “virtual currency events” over the next six years for the crypto tax industry to digest. Taxpayers will continue to take varied positions, some of which will be audited as the IRS steps up compliance efforts and finds a long-term approach.
The audits that end up in tax court will set “de facto tax guidance” for the whole industry to follow. The rulings are sure to be as entertaining but it’s a long road to reveal the answers taxpayers want today. Perhaps tax courts will chime in on whether chain-split coins are ordinary income when a taxpayer exercises dominion and control, capital gains only when sold or something else.
In the meantime, the , and individual CPA and law firms are producing excellent resources to help navigate uncertain crypto seas. The result is a “collective knowledge base” allowing everyone to benefit. Tax clarity is ever-evolving, so get educated.
Enjoy your ride on the crypto tax rollercoaster. No face mask required.