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The IRS may release stricter crypto tax reporting requirements

Updated: Nov 16, 2021

The IRS is on the verge of issuing cryptocurrency guidance for the first time since 2014.

The tax agency’s renewed interest in blockchain is perhaps no surprise, given that the industry is becoming more and more influential. 60% of the world’s major corporations are currently looking into blockchain solutions and experts predict that if adoption trends continue, the industry will be worth $850 billion in four years.

With this growth comes increased attention from regulators, including the IRS and others. If a recent warning letter is any indication of what the new guidance update will entail, cryptocurrency users will most likely need to use a stricter accounting method for determining cost basis when the prepare their taxes.

Down-to-the-minute accuracy may be required

Back in 2014, the IRS said that cost basis only had to be accurate down to the day for many types of cryptocurrency transactions. This flexibility was a benefit because it provided some wiggle room. If the recent warning letters are any indication, that lenient policy may be about to change.

The IRS sent out warning letters last month

On Monday, Nikhilesh De of CoinDesk took a closer look at the language of a warning letter that the IRS sent out to 10,000 US-based cryptocurrency holders in search of clues to what its coming guidance update will entail.

De believes that the wording of the following sentence from the letter indicates that the tax agency will soon release stricter reporting requirements:

“On the tax return, report the virtual currency received at its fair market value, measured in U.S. dollars, as of the date and time of the transaction.”

The 2014 guidance states that for many types of crypto transactions, cost basis only needed to be accurate to the date of the transaction– not the time.

Anyone who received a letter should respond immediately

Randy Tarpey, a CPA at Sickler Tarpey & Associates, believes that the IRS probably used information gathered from US exchange Coinbase to send out the warning letters.

“Certainly anyone that received the IRS letters will need to file amended returns if they didn’t report digital coin transactions on prior year tax returns,” Tarpey said. “The IRS letters promise further action if a taxpayer needs to amend their return and doesn’t. My experience is the IRS does follow up and take further enforcement action.”

Key questions remain unanswered

One potential issue with using an exact cost basis standard is that it adds complexity to an already confusing task.

Sidharth Sogani, CEO of blockchain research and analysis firm CREBACO Global, elaborated on some of the difficulties that the IRS would need to face if it were to go forward with the policy change.

“The IRS can legally ask for the exact time of the trade. But the problem is that crypto is a global commodity and multiple exchanges have different rates and time zones. If you have Bitcoin on your hard wallet and you transfer someone 1 BTC what time and exchange price would be considered? Many exchanges have price differences up to 200 to 300 USD. The IRS should integrate a crypto ticker and provide closing prices just as it does for most global currencies.”

Will the new requirement apply to previous tax years?

If the IRS applies the stricter cost basis requirement ex post facto, you may need to recalculate tax returns from previous years– and any outstanding balances will need to be paid in full. On the other hand, the IRS could also decide to not apply the new rule to previous tax years.

CoinTracking reached out to cryptocurrency business leaders and tax professionals to get their thoughts on what they believe the IRS will do. All the experts we contacted agreed that the letter does indeed provide a preview of what the new guidance will look like. However, opinions varied on how the new rule will be applied.

“I do not think the IRS will have anyone go back and provide new information unless they have improperly reported the trades in a fraudulent manner. Generally speaking, when the IRS changes their mind, they do it on a go forward basis whereas they will make taxpayers report according to their guidance in future years, rather than retroactively. With crypto, I see the same standards being set, especially given the lack of information previously provided by the exchanges.”

Vincenzo Villamena, the managing partner of CPA firm Global Expat Advisors


“It’s likely the IRS will require restatement of prior tax returns with crypto trading transactions to he restated with exact time and date requirements with an associated price. While this differs from the previous guidance of using 1099-K forms for reporting electronic payment records and will potentially create an onerous burden on anyone who traded crypto between 2013 -2017, it’s likely best not to challenge Uncle Sam on this.”

Riley Adams, CPA, Senior Financial Analyst at Google and writer at Young and the Invested


“As the owner of a debt collection and licensing agency I find it hard to believe the IRS would require crypto traders to go back in time and adjust their previous trade deals. That would be a logistics nightmare. Given this change will already add increased regulation in the crypto trade, I don’t believe the IRS will opt to rewrite previous trade deals. I find it much more likely they will simply implement it as a policy for all future transactions.”

Paul McCranie, Founder & President of Cornerstone Support


“When there is existing guidance saying a calculation method is permissible, it is unlikely that the IRS will retroactively force taxpayers to use an alternate method. Going forward, however, I would expect to see a rule that looks exactly like what is described in the warning letters.”

Mike Minihan, international tax attorney and partner at BX3 Capital


“We believe this is an area the IRS is serious about. Congress recently eliminated any doubt as to whether cryptocurrencies would qualify for like-kind exchanges by removing anything but real estate from qualifying for an IRC 1031 exchange. The letter from the IRS is but the first step in informing those who deal in cryptocurrencies that they are responsible for income taxes on transactions.”

Enrolled Agent Steven J. Weil, Ph.D., President and tax manager of the 30-year-old firm, RMS Accounting


“Several cases we are assisting have seen IRS go back to 2011 and want four, five, six or seven years’ worth of historic information. As a side note, we have witnessed how well the IRS is armed with information so if you think they are clueless, they are not and sometimes hire companies such as Aegis FinServ to act as 3rd party external advisers to help authenticate.”

Jim Angleton, President of AEGIS FinServ Corp


“There have been many cases of retrospective taxation in the US. But it’s unlikely to happen for Bitcoin as it’ll be too much of a task to verify the contents of the tax return!”

Sidharth Sogani, CEO of blockchain research and analysis firm CREBACO Global Inc.

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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service. CT Full Service is provided by a team of crypto tax professionals led by Sharon Yip, an expert CPA. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.

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