IRS soliciting contractors for crypto tax handling

crypto tax

The issue of taxation for cryptocurrency has always been a sticking point in the U.S. market, but if you open the news today, the latest on IRS handling of crypto taxes is both predictable and somewhat darkly hilarious.


It seems the IRS is asking third-party contractors to come in and handle the evaluation of cryptocurrency gains by American filers.


“The Internal Revenue Service is seeking third-party contractors to help it assess whether certain U.S. taxpayers have properly paid taxes on their crypto holdings,” write Nikhilesh De and Sebastian Sinclair at Coindesk. “IRS Assistant Deputy Commissioner John Cardone said the agency is looking for contractors to ‘assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency.’”

The essential question – why can’t the IRS handle this type of thing in-house? – is answerable in two ways. First, the average American does not understand cryptocurrency, and this is causing a dire lack of general knowledge around how to treat these investments, so that it’s difficult from the tax filer’s end. Secondly, the IRS is famously so overburdened, understaffed and hidebound in its practices that it is not in any way, shape or form capable of navigating its entrée into the new fintech economies that seem to emerge every single year as digital finance evolves in the blink of an eye.


Just a couple of years ago, it was the “wild west” for investors as many Bitcoin transactions went completely untaxed. Since then, the IRS has ramped up enforcement, and created forms … but its current call for outside contractors shows how woefully unprepared the agency is to take on the amount of crypto data required when the average American has learned how lucrative crypto investing can be.

Now, it’s trying to get a handle on growing interest, but as noted in this January piece, many complicated factors apply to cry[pto taxation.

“Generally, the IRS treats virtual currency as property, much the same way they would regard stocks or other investments,” says April Walker, lead manager for tax practice and ethics at the American Institute of CPAs, to CNBC. “That means that if you bought your Ethereum and then sold it — or if you exchange it for something else, you’re logging either a capital gain or a loss. You’d be responsible for taxes related to the gain. On the other hand, virtual currency that you get from an employer is treated like wages: You must have federal income taxes withheld from the payment, as well as FICA tax and unemployment taxes.”

Investors may get 1099s and 1099k’s, which can make reporting easier, but the bottom line is that, if the IRS is outsourcing its own evaluation, that’s not a great sign for the counterparties – the filers who rely on good faith negotiations with this federal agency every year.