The Internal Revenue Service should clarify that its 2019 guidance on virtual currency is not authoritative, increase financial institution reporting of virtual currency, and address with Treasury’s Financial Crimes Enforcement Network (FinCEN) how foreign asset reporting laws apply to virtual currency, the Government Accountability Office said.
In a just-released report, GAO states that information reporting by third parties, such as financial institutions, on virtual currency “is limited, making it difficult for taxpayers to comply and for IRS to address tax compliance risks.”
Further, many virtual currency transactions likely go unreported to the IRS on information returns, “due in part to unclear requirements and reporting thresholds that limit the number of virtual currency users subject to third-party reporting,” GAO said.
IRS issued guidance in 2014 and 2019 that addresses some questions taxpayers and practitioners have raised, for instance, that virtual currency is treated as property for tax purposes and that using virtual currency can produce taxable capital gains.
“However, part of the 2019 guidance is not authoritative because it was not published in the Internal Revenue Bulletin (IRB),” GAO said. “IRS has stated that only guidance published in the IRB is IRS’s authoritative interpretation of the law. IRS did not make clear to taxpayers that this part of the guidance is not authoritative and is subject to change.”
IRS and FinCEN need to also “clearly and publicly explain when, if at all, requirements for reporting financial assets held in foreign countries apply to virtual currencies.”
The application of reporting requirements under the Foreign Account Tax Compliance Act, or FATCA, to virtual currency also need to be explained, GAO said.
Clarifying and providing publicly available information about those requirements “could improve the data available for tax enforcement and make it less likely that taxpayers will file reports that are not legally required,” GAO said.
— Check out Ric Edelman: Advisors Shouldn’t Ignore Bitcoin, Blockchain on ThinkAdvisor.