Wendy Walker, solution principal at the tax compliance company Sovos, described reporting as the most important aspect of tax filing that people in the blockchain industry should know about.
“Even if you don’t owe income taxes, you still have to report details of the transactions,” Walker told Cointelegraph in an interview. “I think that’s probably one of the key things about this moving of the question to the front of the 1040” she said, referencing the IRS’ recent updates to the 1040 income tax form.
This update requires citizens to disclose whether they’ve handled crypto assets during the filing year, asking “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Checking this box is just the tip of the iceberg for those involved in crypto, however. Crypto often involves transactions, buying, selling, fees, multiple storage locations and a plethora of other information that may apply to tax filing requirements in one form or another. Given the complications involved, is taxation currently even plausible in crypto? Walker thinks so, but says the IRS also has some catching up to do.
“Although this guidance has been coming out over the last year and we’ve seen enforcement, the IRS really hasn’t understood crypto,” Walker said. The U.S. tax agency has come forward with a number of attempted clarifications and rulings around crypto taxation since 2019. Such efforts, however, have shown the entity’s lack of industry knowledge in some ways.
“While they’re doing all this enforcement, they’re also kind of learning about it at the same time unfortunately,” Walker said. She specifically mentioned tax guideline difficulties when it comes to crypto transfers between exchanges, citing a lack of related documentation. There is also something of a gray area for digital assets classified as commodities, securities, or otherwise.
U.S. regulatory authorities have made some headway on these classifications, though many crypto assets still remain ill-defined.