Cryptocurrency industry non-profit research and advocacy organization Coin Center is calling for Congress to enact legislation that will provide bitcoin investors with safe harbor on federal taxes incurred as the result of software forks.
Writing in a post published on the Washington, D.C.-based organization’s blog, executive director Jerry Brito argued that cryptocurrency investors who have made a good-faith effort to correctly pay taxes on funds received from blockchain forks should not be penalized retroactively since the Internal Revenue Service (IRS) has not provided clear guidance on this matter, aside from stipulating that cryptocurrency investments should be treated like property for tax purposes.
While that classification is clear enough for someone who purchases bitcoin and then sells it later at a profit, it provides no guidance on how investors should treat funds received when a single cryptocurrency network splits into multiple, independent blockchains, leaving current coin-holders with ownership of new funds that they may not even want.
"In the absence of useful guidance, taxpayers have filed their returns in a state of genuine confusion about the state of the law. Unfortunately, this puts them at risk of being assessed penalties on top of their tax liability, should they get the law wrong. It would be unconscionable for the IRS to issue guidance answering these open questions and retroactively penalize those taxpayers who didn’t correctly guess what the answers would be."
The most well-known hard forks resulted in the creation of Ethereum Classic and Bitcoin Cash, which split from the Ethereum and Bitcoin networks in 2016 and 207, respectively, though hundreds of other projects have attempted to bootstrap their communities by launching via a blockchain hard fork.
While some U.S. investors seem to have spurned reporting requirements, prompting the IRS to wage a targeted campaign to unmask bitcoin tax cheats, Brito says that it's unfair for the agency to take punitive action against investors who have attempted to report their cryptocurrency investment income accurately but have come up short.
"Until the IRS starts to give clear answers to basic tax questions taxpayers have about cryptocurrencies, taxpayers who take a shot at reporting their cryptocurrency-derived income shouldn’t be hit with penalties on top of their tax liability. This is especially true for taxpayers who have a record of paying their taxes on time when the rules are clear."
Brito says that, since the IRS has remained silent on the issue, Congress should take action to provide taxpayers who made a good-faith effort to report their cryptocurrency income with "safe harbor," such that they would not face any punitive action or penalties on top of covering their tax liability. He notes that this safe harbor would not necessarily contravene with subsequent IRS rulings since Congress could include a stipulation that the provision will expire once the agency issues specific guidance on blockchain forks.
"Taxpayers can only comply with the law when the law is clear. Until the IRS issues the sorely necessary guidance that tax practitioners has been clamoring for, confused taxpayers shouldn’t be penalized for being justifiably uncertain about how to report their cryptocurrency-derived income."
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