The American Institute of CPAs is asking the Internal Revenue Service to offer more guidance on how to help taxpayers compute their losses on digital assets such as cryptocurrency.
In a letter last week to the IRS’s new commissioner Daniel Werfel and principal deputy chief counsel William Paul, the AICPA asked the IRS to provide guidance to clarify how digital asset losses are handled under different scenarios so taxpayers and tax preparers would have more confidence in complying with the IRS’s reporting requirements.
The IRS has been slow to offer guidance on crypto. In 2014, it issued a revenue ruling that required “virtual currency” to be treated as property for tax purposes, but in recent years with the growth in popularity among investors in cryptocurrencies such as Bitcoin and Ether as well as other crypto assets such as nonfungible tokens, the IRS later added more guidance, along with prominent questions at the top of the Form 1040 asking taxpayers if they received, sold, exchanged, gifted or disposed of any “digital asset.” It now has a frequently asked questions page on virtually currency on IRS.gov that’s periodically updated with new FAQs, mostly recently in January. Crypto investors suffered heavy losses last year on NFTs and other tokens, although the market has bounced back somewhat this year on some cryptocurrencies such as Bitcoin.
The AICPA asked the following questions to be addressed in future IRS guidance:
- What facts indicate worthlessness of a digital asset?
- What facts indicate abandonment of a digital asset?
- When, if ever, might digital assets be securities for tax purposes?
- Theft of a digital asset held for investment. Does the Ponzi loss guidance of Rev. Rul. 2009-9 and Rev. Proc. 2009-20 apply beyond Ponzi-losses to other fraudulent arrangements, including digital asset losses from certain digital asset exchange activities?
- What is the tax effect of lending digital assets? (Some people may find themselves in this position with some bankrupt exchanges.)
- When would section 1234A apply to termination of a digital asset?
- How should a taxpayer report digital asset activity if they are unable to access their records due to bankruptcy of an exchange?
- Is a digital asset considered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlying digital asset?
“With the complexities and recent bankruptcies involved with digital asset exchanges, taxpayers and practitioners are facing many issues with the tax treatment of losses of digital assets and need guidance,” said Eileen Sherr, director for tax policy and advocacy with the AICPA, in a statement Thursday. “Taxpayers and their advisors need clear guidance to accurately calculate their losses and properly meet their tax obligations and we urge the IRS to adopt our recommendations and provide this guidance.”
Congressional legislation on 529 plans
Separately, on Thursday, the AICPA threw its support behind a bipartisan bill in Congress aimed at expanding the use of Section 529 college savings plans. H.R. 1477, the Freedom to Invest in Tomorrow’s Workforce Act, was introduced in the House last month by Rep. Abigail Spanberger, D-Virginia, and Rob Wittman, R-Virginia, to expand eligible uses of 529 plans to include fees and expenses required to obtain or maintain recognized postsecondary credentials, including professional credentials and certifications. The bill would also provide accounting professionals with greater financial flexibility as they enter the workforce and seek to further their education.
In a letter last week to the bill’s co-sponsors, the AICPA stressed the importance of ensuring that 529 plan owners and administrators can easily understand and use the expanded benefit and encourages increased clarity around the process used to identify a certification as a “recognized postsecondary credential,” as well as clarity on the qualifying expenses, fees and costs under the proposal.
“We are grateful to Representatives Spanberger and Wittman for their leadership on this important legislation to increase the flexibility of using the 529 plans,” said Jan Lewis, chair of the AICPA Tax Executive Committee, in a statement Thursday. “Certifications and continuing education are cornerstones of the accounting profession, as tax and accounting laws continue to evolve. This bill allows greater flexibility to accounting professionals to gain and maintain professional certifications, including the CPA certification, and better serve our clients.”
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