Supplemental IRS Guidance on Taxation of Cryptocurrencies is Needed: Expert Take

"We recommend the IRS release immediate guidance regarding the tax treatment of virtual currency transactions, similar to that of Notice 2014-21 so that authoritative guidance exists," said Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee.

AICPA's letter to the IRS suggests that taxpayers should report virtual currency events, by making an "Election to Include a Virtual Currency Event as Ordinary Income in Year of Transfer" within 30 days of the event.

If a taxpayer does not make the election, then the virtual currency event is reported as ordinary income when a taxpayer later disposes of the virtual currency received in a prior event.

If the virtual currency is a capital asset in the hands of the taxpayer, future disposition of the asset would generate a capital gain or loss and the income reported would become the basis in the virtual currency.

Expenses of obtaining cryptocurrencies: Users of cryptocurrencies can obtain it by exchanging it or borrowing it for fiat currencies; or other cryptocurrencies including ICO tokens; or by "Mining," which is the process of having computers compete to solve complex mathematical problems.

Section 4, Q&A-8 of Notice 2014-21 states that when a taxpayer successfully mines virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.

"The rapid emergence of virtual currency has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it. Moreover, the development in the number of types of virtual currencies and the value of these currencies make these questions both timely and relevant to a growing number of taxpayers and tax practitioners", Nellen added.

Foreign reporting requirements for cryptocurrencies: Some virtual currencies are traded on centralized exchanges that operate in jurisdictions outside the US. The exchanges are either a pure virtual currency exchange or a virtual currency exchange which allows virtual currencies to exchange into fiat currencies.

AICPA's letter to the IRS, suggests that taxpayers should report the value of cryptocurrencies and fiat currencies held at those foreign exchanges for FBAR and FATCA purposes if they meet the necessary threshold, but not when a taxpayer holds cryptocurrency in a wallet which the taxpayer owns, controls and is in possession of a private key.

"Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client's reporting requirements. The issuance of clear guidance in this area will provide confidence and clarity to preparers and taxpayers on application of the tax law to virtual currency transactions" concluded Nellen.