Although the US Internal Revenue Service (IRS) recently won a case that forced a large cryptocurrency exchange to turn over the account records of more than 13,000 customers, the IRS and other US authorities have maintained a relatively hands-off approach in other respects.
The IRS still falls back on guidance on crypto assets that accompanied regulations published in 2014. This states that a taxpayer will experience a capital loss or gain upon concluding an exchange or sale of a cryptocurrency serving as a capital asset. The implication is that the IRS views cryptocurrencies as similar in nature to traditional assets.
Asked to describe the current state of cryptocurrency regulation in the US, Perianne Boring, Founder and President of the Chamber of Digital Commerce, told The New York Times: “It’s unorganized and incredibly complicated — and it’s really putting the US at risk of falling behind from an innovation and technology perspective. There are turf wars between the different regulatory agencies, and none of this is in the best interest of the US or the blockchain technology industry.”
In the UK, the most recent specific pronouncement by HM Revenue & Customs (HMRC) on the tax treatment of cryptocurrencies was published in March 2014. Rather than giving definitive guidance, it continues to insist that tax liabilities on crypto assets will be decided on a case-by-case basis.
A particularly thorny issue arises when developers modify the blockchain ledger code underlying a cryptocurrency to such an extent that it causes a “hard fork” — in simple terms, the creation of a separate parallel currency. For instance, Bitcoin underwent this process in August 2017 to spawn Bitcoin cash.
This raises a number of tricky questions that tax administrations worldwide have yet to answer definitively: on the day of a fork, does an owner of the original asset recognize income for the new asset? What if there is no market for the new asset because, say, digital wallets do not support it? And at what value should the adjusted basis be calculated? If it’s the fair market value, at what date: that of the fork or the date on which it can be transacted?
It’s clear that authorities are reluctant to commit themselves at a time when new products are emerging almost daily, points out Chirag Patel, who heads our EY Americas Tax Innovation Foundry. It could be that they don’t want to stifle innovation but, whatever the reason, the continued lack of definitive tax guidance is a real worry for holders of crypto assets seeking clarity about their compliance responsibilities.