THE IRS CAN SHOW CRYPTOCURRENCY HOLDERS THAT MONEY TALKS THROUGH UPDATED GUIDANCE AND CONDITIONAL FORGIVENESS

IRS Tax Notice 2014-21 was the first IRS issued guidance since the creation of cryptocurrency. This guidance stated that all cryptocurrency transactions are treated as property, meaning that every transaction results in a gain or loss equating to the difference between the price of the crypto at purchase and the price of the sale. However, this guidance failed to acknowledge the multifunctionality of cryptocurrency, and the IRS continues to try and correct the consequences that have come from issuing this incomplete guidance. Although difficult to measure given the lack of access to individuals’ tax returns, sources have estimated that as low as 1% of the American population is correctly reporting their cryptocurrency income. In an attempt to curb noncompliance among cryptocurrency holders, the IRS has issued summonses on cryptocurrency intermediaries to try and identify those holders who are not paying their fair share of taxes. While these summonses are a step in the right direction, the IRS must also update its cryptocurrency guidance to better reflect the diversity that exists within the realm of cryptocurrency. There is a perception among holders that cryptocurrency is anonymous, but given the inherently public nature of the electronic ledger known as the blockchain, many forms of cryptocurrency allow holders to be identified. By working with computer scientists, the IRS can track down noncompliant holders. Furthermore, the complexity of cryptocurrencies creates confusion among crypto holders, and this dilemma can be solved by requiring intermediaries to issue detailed tax forms to all holders engaging in cryptocurrency transactions. As reflected through the 10,000 letters sent to potentially noncompliant crypto holders in July 2019, the IRS is focused on collecting the proper amount of taxes from holders. Through the help of updated guidance, intermediaries, and computer scientists, the IRS has an opportunity to improve cryptocurrency tax compliance