Before responding, it would be beneficial for members of the crypto community to acquaint themselves with the nuances of tax law, and fortunately, they have a generous two-month timeframe to do so.
On July 11, Chairman Ron Wyden and Ranking Member Mike Crapo of the United States Senate Financial Services Committee issued an open letter to the digital asset community, seeking valuable input regarding the taxation of digital assets.
Recognizing the intricate nature of the taxation challenges involved, the senators not only expressed their desire for solutions but also provided background reading materials from the Joint Committee on Taxation to assist respondents in their preparations.
According to the senators, the Internal Revenue Code of 1986 does not offer a clear-cut classification for digital assets. They have consequently posed a comprehensive set of inquiries, organized into nine distinct subject areas, to gain clarity:
“In recent months, the Committee on Finance initiated a bipartisan effort to identify key questions that lie at the intersection of digital assets and tax law.”
The open letter addressed various matters of the taxation of digital assets, encompassing subjects such as fair value accounting (mark-to-market), the trading safe harbor to incentivize foreign investment, digital asset loans, wash sales, constructive sales (linked to short-selling), income generated from staking and mining, the concept of “nonfunctional currency,” reporting obligations for foreign firms, and the valuation and substantiation of assets on an exchange.
Throughout the letter, specific sections of the tax code were frequently cited about the questions posed.
A significant portion of the Internal Revenue Service‘s (IRS) focus on cryptocurrencies thus far has been dedicated to combating illicit activities. Earlier this year, the agency proudly announced that it had successfully seized a total of $10 billion in cryptocurrency as part of its law enforcement endeavors.
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The IRS is demonstrating a proactive stance when it comes to income taxation concerning cryptocurrencies. A recent case exemplifies this approach, wherein the agency issued a summons to the crypto exchange Kraken in 2021, seeking user information on transactions exceeding $20,000. On June 30, the District Court for the Northern District of California ordered Kraken to furnish the requested information.
The Senate committee said that it will be accepting responses to this letter up to September 8.
