by Sahel Ahyaie Assar
Before the rise of the Foreign Account Tax Compliance Act (FATCA) became a “thing” in the early 2000s, there were many fishing expeditions by the Internal Revenue Service (IRS) into learning the methods Americans used to hold funds offshore – sometimes engaging in tax evasion. I make the distinction because not all Americans with funds overseas have a guilty mind. Some just prefer to diversify or are part of an international family structure. Nevertheless, the methods learned by the Department of Justice (DOJ) and the IRS, eventually led to Congress’s enactment of FATCA in 2010. With the rise of cryptocurrencies and virtual currencies, the IRS is keen to learn more about the application and uses of these virtual currencies and is once again flexing the agency’s investigative and enforcement muscles to track down non-compliant taxpayers.
If history is prologue, taxpayers should seriously start (if they haven’t already) reviewing their transactions using cryptocurrencies and assess early on (i.e., before the IRS contacts them) what are the correct U.S. federal income tax consequences to transactions they have concluded using cryptocurrencies.
To help bridge a gap between the available government guidance and what remains open and subject to interpretation — ergo, causing confusion for taxpayers’ compliance initiatives, this report provides a general overview of the U.S. federal income tax consequences and reporting requirements relating to transactions involving cryptocurrencies.