Blockchain technology’s ability to decentralize systems is both its blessing and its curse. On one hand, proponents of the technology praise decentralization as its biggest benefit.
They’re not wrong. Nobel Prize winner Ronald Coase once proposed that dealmaking was more productive when done collectively. Blockchain technology is going to help us do just that on a much larger scale.
But there’s another side to this technology — one that has prompted the IRS to enact regulations which will affect the cryptocurrency industry.
According to the IRS’s records, only a tiny percentage of taxpayers report income related to cryptocurrency. As a result, the IRS now plans on being more aggressive with taxpayers who don’t report these transactions.
Why, however, does this crackdown matter to you? Will it set the tone for cryptocurrency businesses in the future?
Let’s dissect this initiative and discuss its future impact.
How Serious Is The IRS Crackdown?
So how serious is the IRS’s vow to crack down on the reporting of cryptocurrency transactions? The answer isn’t so simple. That said, we can tell you what the IRS and tax practitioners have said.
The IRS has clearly stated that it has no plans to create a disclosure program that addresses tax noncompliance which concerns cryptocurrency. In other words, the agency doesn’t appear to be actively tackling the issue at the moment.
Despite the IRS’s assurances, some tax practitioners aren’t convinced. Many of them expect the agency to create such a program at some point in the near future. The IRS can only, after all, let tax noncompliance slide for so long.
What Steps Has The IRS Taken Already?
Perhaps there’s some truth to what the skeptical tax practitioners are saying. The IRS is slowly laying the groundwork for regulating how cryptocurrency assets are handled.
And the government agency is being very diplomatic about it.
The agency has already started, for instance, sharing information related to cryptocurrency transactions with other countries. The idea here is that establishing relationships with foreign agencies and creating new task forces will make reigning in cryptocurrency crime easier in the long run.
That is to say, the IRS wants to establish a Memorandum of Understanding with other nations and agencies — a set of principles which governs all parties’ relationships on the issue of cryptocurrency.
But how would a Memorandum of Understanding benefit the IRS?
Let’s take a look.
A Memorandum of Understanding: The IRS’s Perspective
Blockchain technology has forever complicated the way the IRS approaches its job. Cryptocurrency transactions are fairly anonymous and instantaneous from country to country. As a result, the technology had made it increasingly hard for the agency to trace cryptocurrency funds.
To make matters worse, a blockchain doesn’t reveal information about jurisdictions like traditional banks do. This means that regulators have to figure out a way to monitor cryptocurrency transactions.
Because, as things currently stand, if funds leave the U.S. and are put into a wallet or exchange in a different country, the IRS’s capabilities become extremely limited.
It’s this conundrum which gets to the heart of the matter:
If the IRS had agreements in place with other countries and agencies, it would have more power to effectively monitor these funds after they left the U.S.
Which brings us to our next question…
Why Should You Care?
So why should you care about any of the IRS’s frustrations or its attempts to collaborate with other nations? After all, we did say that the IRS claims that it’s not actively creating a program which tackles the issue of cryptocurrency.
First and foremost, much of what the IRS is negotiating with other nations is going on behind the scenes. There’s a lot of red tape, so there’s no way for the rest of us to know what’s really happening within the agency.
Not only that, but tax practitioners seem convinced that the IRS will eventually attempt to more explicitly regulate how cryptocurrency assets are handled. We can’t so easily discount these theories.
What Can You Do About This?
Now for the big question:
What can you do about any of this, anyway?
Here are a couple of pieces of advice from our team:
1. Learn How to Properly Report Your Cryptocurrency Assets
Though the IRS doesn’t have any plans for putting an official program in place, you have no excuse not to report your cryptocurrency gains (or losses). Don’t ever hide transactions from the agency.
Also, keep a log of all of your transactions. Everything must be accounted for when the IRS comes looking for more information.
2. Just Comply
We’ve said it again and again:
Comply with the official regulations which have already been put into place. Your cryptocurrency company’s success hinges on your compliance.
As a matter of fact, we always recommend that you go above and beyond mere compliance. Because you should be making compliance an integral part of your company, not just a chore you have to complete to keep your doors open.
If you’re not sure where to start with developing a compliance strategy, you can start here.
Don’t Panic: You’ll Be Okay If You Remain Compliant
At the end of the day, you don’t have much to worry about if your business epitomizes compliance and reports its cryptocurrency assets. You’re not going to wake up tomorrow morning and find the IRS breathing down your back.
But here’s something you should always keep in the back of your mind:
Cryptocurrency is non-national stored value. This makes it an entirely unique phenomenon, the likes of which the IRS has never dealt with before. This means, like many in the crypto space, the IRS is also in learning mode. It’s up to you to help set the tone by raising the bar on your own compliance.
Keep those detailed records. Yes, the blockchain is an immutable record, but maintain your own detailed records. Add notes and context to the transactions in your transactional records. In fact, many crypto wallets offer this as a standard feature already.
Who knows? With detailed records, you might even identify some trends or inefficiencies in your buying/selling habits that could help strengthen your overall business and improve future decision making.
For more insights on tax and other crypto compliance matters, contact us at BitAML.