Prepared by Michael Litwin, CPA, CA, TEP
AS OF OCTOBER 2019
It may not come as a surprise, that both Canada and the IRS imposes taxation on cryptocurrency transactions.
The IRS issued guidelines on this subject in 2014 and information can be found by following this link: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
In 2014, the IRS issued Notices 2014-21, 2014-16.1.R.B.938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. The frequently asked questions (“FAQs”) link expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situation.
Note: Except as otherwise noted, these FAQs apply only to taxpayers who hold virtual currency as a capital asset. For more information on the definition of a capital asset, examples of what is and is not a capital asset, and the tax treatment of property transactions generally, see Publication 544, Sales and Other Dispositions of Assets.
Taxpayers who hold or invest in cryptocurrencies should be aware that starting in 2019, it is expected that the IRS will have a new question on the new 1040 tax form concerning holding or investing in cryptocurrency.
The current draft of the question is “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It then offers the options of answering either Yes or No.
Taxpayers (Canadian and American) are well advised to check out Revenue Ruling 2019-24 and the frequently asked question.
Earlier this month, as part of a larger effort to help taxpayers and tax professionals deal with cryptocurrencies like Bitcoin, and to enforce the tax laws in this rapidly changing area, the IRS issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency, including Revenue Ruling 2019-24 and frequently asked questions (see IRS issues more guidance on cryptocurrency). The new guidance supplements the original guidance the IRS issued back in 2014 on virtual currency in Notice 2014-21 that describes how virtual currency is treated for American federal tax purposes
Traders and dealers certainly know about “soft fork and hard fork”. The IRS has commented on this. The new revenue ruling deals with some common questions asked by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork, soft fork and airdrop situations. The set of FAQs explains virtual currency transactions for those who hold virtual currency as a capital asset. We encourage investors to familiarize themselves with the tax rules.
Taxpayers should be aware that the IRS small business/self-employed division are putting new energy and resources in this area.
The initial serious forms will be targeting syndicated conservation easements and micro-captive insurance.
The IRS has announced that they have been taking advantage of data analytics technology to determine whether taxpayers own any cryptocurrency.
The IRS plans to focus on cases where there appears to be genuine evidence to fraud in the cryptocurrency area. The CRA cannot be far behind.
Taxpayers should be very careful to determine if an enquiring agent is a genuine IRS or CRA agent when they commence an initial communication with a potential examiner.
The IRS or CRA will never telephone you or send you an email. All enquiries start with a letter.
Please contact us if you feel that we can be of assistance.