Tax justice for crypto users: The immediate and compelling need for an amnesty program
The United States Internal Revenue Service is blinded by its desire to defeat cryptocurrency. It rushes to enforcement without first thinking how best to get there. It has spent millions of taxpayer dollars training its personnel and procuring private contractors to uncover noncompliance by crypto users. The IRS is arming its people to aggressively enforce the tax laws applicable to cryptocurrency. All the while, it ignores “established” frameworks to help achieve tax compliance and collection on crypto transactions.
Crypto tax amnesty is the easiest and fairest way to get from point A to point B, yet the IRS prefers unfair and aggressive tactics that disproportionately affect one population of taxpayers — the young.
That framework, a well-publicized amnesty program, began over 10 years ago. There is already a fine blueprint to follow. In March 2009, the IRS announced a foreign tax amnesty program named the Offshore Voluntary Disclosure Program, or OVDP. The program came in response to U.S. taxpayers not disclosing their foreign bank accounts and not reporting billions of dollars in tax on foreign income. In exchange for voluntary disclosure and payment of tax, OVDP offered taxpayers an opportunity to avoid criminal prosecution and pay far smaller penalties (sometimes, none at all). Without OVDP, taxpayers faced jail time and a variety of draconian civil penalties. The program was a great success — in just seven months, some 15,000 disclosures were made, netting nearly $3.5 billion in back taxes, penalties and interest.
Seeing the utility of OVDP, the IRS extended the program through several iterations. In total, some 56,000 taxpayers came forward and the IRS collected more than $11 billion in back taxes, interest and penalties. Even the worst prognosticator could predict a similar result with a crypto tax amnesty program. Consider this: There is a crypto “tax gap” of $25 billion dollars, nearly 37 million Americans now own some form of cryptocurrency, and the compliance rate is only about 50%.
The tax gap is wide enough, the population is many, and the compliance rate is dismal. Because of this, crypto tax amnesty could produce far more disclosures than OVDP and collect many more tax dollars. The similarities are apparent, but several key differences further favor crypto amnesty.
Crypto user demographics
The first difference lies in the demographic of crypto users. Nearly 60% of Bitcoin (BTC) users are under 35 years old, 17% of whom are barely out of high school, currently in their early 20s. This is important because this demographic is by far the least experienced group of taxpayers. Unlike taxpayers engaging in transactions abroad, millennials are the least likely to recognize the nuances of reporting capital gains and losses, limits on capital losses, disallowance of capital expenditures, carryover losses, stepped-up basis, carry-over basis and adjustments to basis, and the list goes on and on.
Despite this inexperience and youth, the IRS refuses to offer crypto users a tax amnesty program. Instead, the IRS offered tax amnesty to a far more experienced group of taxpayers engaging in foreign transactions. These taxpayers are far more likely to understand the nuances of tax law and employ tax attorneys and CPAs, and are more often tax “cheats,” whereas crypto evaders are often inadvertent. Despite this, the IRS unscrupulously targets the least-experienced demographic.
There is yet more unfairness beyond the simple demographic. Foreign Bank Accounting Reporting, or FBAR, is a foundationally solid area of tax law, while cryptocurrency taxation is not. Fairness dictates that amnesty should be offered upon the simple fact that cryptocurrency taxation is often misunderstood, and is a new and emerging area of tax law. The rules are not well settled, and the current IRS guidance only consists of two IRS Notices and a set of FAQs — neither of which, by the way, are legally binding on the IRS. That is, a crypto taxpayer can not legally rely on them. Until legally binding guidance is released and the rules better developed, crypto tax amnesty is the fairest solution.
The crypto demographic is further handicapped by the fact that third-party reporting of crypto transactions is virtually nonexistent (only two of the nine U.S.-based cryptocurrency exchanges have published policies on transactional reporting). In other contexts, taxpayers can rely on annual 1099s or brokerage statements to report their basis and capital gains or losses. This is not available to most taxpayers in their 20s who are engaging in cryptocurrency transitions and likely only accustomed to simple W-2 tax returns. Rather, they must sit down with a pencil and paper and track spot prices (with no NYSE to rely on), determine fair market values, adjust their basis, and calculate their gains and losses across multiple exchanges at different times with different fees.
Crypto tax forms
Coinbase, one of the largest and most popular exchanges, just switched from issuing 1099-K forms to 1099-MISC forms. This is significant because the reporting thresholds for the latter are much lower. For Forms 1099-K, there is a reporting obligation if the taxpayer exceeds 200 transactions or a $20,000 threshold. In contrast, 1099-MISCs are issued if a taxpayer receives more than just $600 in payments during the year. Now, because of lower thresholds, tens of thousands more taxpayer names are being provided to the IRS — all without a mention of basis. Until third-party reporting of cryptocurrency is in line with other capital transactions, crypto tax amnesty is the fairest solution.
Or worse yet, perhaps some young taxpayers are paid in cryptocurrency or buy and sell products using cryptocurrency. In that instance, they must calculate a reasonable FMV for the cryptocurrency changing hands at different times — all the while tracking their basis. It is not difficult to imagine a young taxpayer keeping a constant log of cryptocurrency received for services rendered or exchanged goods, making proper FMV adjustments across multiple exchanges at different times.
If a person receives Bitcoin on Day 1 in exchange for selling a video game, and then receives Bitcoin on Day 2 for selling a pair of sunglasses, he must calculate the FMV of the Bitcoin earned at different intervals, less basis, all with a solid understanding of the impact of self-employment tax and the need to pay estimated taxes. The young taxpayer’s logbook may rival that of a long-haul trucker. The missteps here are many, and crypto tax amnesty is the fairer solution, much fairer than crypto-based, self-employment tax audits.
To add salt to the wound, there is still no IRS de minimis rule for crypto transactions involving even the smallest purchase of property. Arguably, the young taxpayer could incur a capital gain when he buys a pack of gum with XRP (a pack of gum costs $1.50 and Ripple trades around $0.50). Because he received a thing of value beyond the XRP he paid, he has a capital gain. In this regard, the current IRS regime teeters on the brink of absurdity.
And finally, the IRS guidance on cryptocurrency taxation makes not one mention of penalties for noncompliance, while FBAR guidance is laden with discussions of penalties. Until a sensible de minimis exception is enacted, and until the IRS adequately educates young crypto users on noncompliance penalties, crypto tax amnesty is the fairest solution.
The Taxpayer Bill of Rights
The Taxpayer Bill of Rights addresses this very problem of unfairness, shouting amnesty at the top of its lungs.
The Right To Be Informed, says:
“Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.”
The Right to a Fair and Just Tax System, says:
“Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely.”
The IRS meets its burden with FBAR but fails miserably with its tax policies on cryptocurrency. It attacks the least experienced taxpayer but rewards the most experienced. It warns the most experienced taxpayers about penalties but leaves the least experienced guessing. It ignores that third-party reporting offers young taxpayers no quarter. It imposes complex tax nuances on the simplest demographic, and it disregards the foolishness of auditing that pack of gum.
Crypto tax amnesty has gotten little fanfare because the right people are not concerned — it is a young person’s tax problem. Big banks and large corporations cared about foreign bank account reporting and a tax amnesty program emerged, but crypto users have no centralized backing to support them. In fact, their very existence is based on decentralization. Unfortunately, until the “right” people are affected, crypto tax amnesty is unlikely. But if institutional integrity holds meaning, the IRS should extend the olive branch — notwithstanding the absence of the “big hitters.”
Mr. IRS Commissioner, with all due respect, open the borders and offer amnesty to this flood of young taxpayers. A fair and just tax system demands it.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jason Morton practices law in North Carolina and Virginia and is a partner at Webb & Morton, PLLC. He is also a Judge Advocate in the Army National Guard. He focuses on tax defense and tax litigation (foreign and domestic), estate planning, business law, asset protection and the taxation of cryptocurrency. He studied blockchain at the University of California-Berkeley and studied law at the University of Dayton and George Washington University.