Cryptocurrency continues to be a high-priority topic at the Internal Revenue Service and its handling as a taxable asset will evolve with the markets that use it.
Currently, cryptocurrencies such as Bitcoin, are not considered a form of currency like the U.S. dollar or the Euro, but rather as property, even though it can be used for the exchange of goods and services or even as payment of wages, Nick Silva, program manager of Cyber and Forensic Services at IRS’ Criminal Investigations Division explained during a July 26, 2022, session of the IRS Tax Forum.
“The gain or loss on the sale is treated similar to the sale and exchange of securities,” Silva explained. “Basis is a fair market value on the date it’s received,” and the values are subject to information reporting to the IRS, most likely reported on a Form 1099-K.
He also noted that receipt of virtual currency as a payment for goods or services is includable in income at its fair market value on the date it is received and when it is used to pay wages, the value on the date of the transaction is subject to tax withholding.
Silva took the opportunity to remind forum participants that as January 1, 2023, people will be required to report the receipt of digital assets in that are valued at more than $10,000 in one or more transactions.
“It applies to any business, not just [digital asset] brokers or any single business,” he said. “If you’re paying for a service with crypto or a digital asset, you will have to report that if it’s over $10,000.”
Silva added that this is going to change the crypto landscape as it is expected to generate “a lot more reporting.”
Cryptocurrency as an asset
Silva offered some possible insight as to why cryptocurrencies are treated as assets rather than currencies, and part of the reason may have to do with how Bitcoins and other cryptocurrencies are used.
He pointed out that one of the biggest names to accept Bitcoin as payment for a good or service is Tesla, although other companies such as Amazon and Expedia also will accept it. And while Papa John’s made headlines for accepting Bitcoin for a pizza, the nature of a Bitcoin transaction could limit its use as a currency, at least under current circumstances.
“I think the use of it for everyday stuff is still not really there,” Silva said. For a big-ticket item, like a car, that is not an everyday purchase, the transaction makes more sense.
But for a coffee at your local Starbucks? “The amount of time it takes to transact and then convert over [to a local currency], it’s just not convenient,” he said, noting that a single Bitcoin transaction can take about 10 minutes to process. “It’s easier just to pay with dollars or cash. So these are the struggles still with accepting Bitcoin.”
A glimpse into enforcement
That still does not take away from Bitcoin’s appeal, Silva continued, noting its anonymity, ease of sending money overseas, and features that enhance the security of transactions. Of course, that also makes it very popular with those conducting illegal activities, something the IRS continues to combat.
To that end, he highlighted that the agency now has two full-time units in Washington, D.C., and Los Angeles focused on cybercrime, including the use of cryptocurrency for the use in illegal activities.
Silva, who works out of the headquarters section in the D.C. office, offered a window into some of the work the unit does.
“We coordinate multijurisdictional investigations [and] assist with policy and procedures, anything we can do to assist agents,” he said. “We also have undercover storefront and undercover agents that we backstop with our monitors. We have CIS agents, which they support us on all our data recovery efforts with these types of cases. And we have our CSU which really supports almost all of our high-level investigations in CI.”
He did note one of the top priorities of his office is “investigative projects around virtual currency tax fraud,” with eyes on the use of virtual currency when it comes to tax evasion, employment tax and other areas where virtual currency could be an enabler for tax fraud. This is in addition to the work the agency does in investigating and prosecuting crime on the Dark Web and places that use virtual currency to facilitate fraud and other illegal activities.