Page 3 - Reporting Virtual Currency Transactions to the IRS: Time May Be Running Out for Affected Taxpayers

COL. COLUMNS I Tax Practice & Procedure

difficult for the IRS to penalize failure to virtual currency transactions may be able to contrary to published IRS guidance may,
report virtual currency transactions before argue that the IRS’s position is wrong and however, want to file a Form 8275 with her
that time. The IRS will, however, undoubt- different tax principles should apply to this return, as positions that have a reasonable
edly take a contrary position. new technology. After all, when the tax law basis and are adequately disclosed are not
In addition, IRS Notice 2014-21 is simply is uncertain or ambiguous, a taxpayer may subject to substantial understatement penalties
the IRS’s position regarding the taxation of have reasonable cause for failure to properly [IRC section 6662(d)(2)(B)(ii); Treasury
virtual currency; while it is prudent to comply report in accordance with an unclear law [see Regulations section 6662-4].
with that notice, it does not have the force Treasury Regulations section 1.6664-4(b)(1)]. Some commentators have suggested that
of law. As a result, taxpayers with unreported A taxpayer who knowingly takes a position taxpayers can take advantage of the IRS’s
Offshore Voluntary Disclosure Program
(OVDP) to report previously unreported vir-
tual currency transactions. The purpose of
the OVDP is for taxpayers to report previ-
ously unreported foreign bank accounts and
earnings from those accounts. The IRS’s
position to date has been that taxpayers do
not have to report virtual currency on
FinCEN Form 114, Report of Foreign Bank
and Financial Accounts (Allison Bennett,
“IRS: No Bitcoin Reporting on FBARs for
This Filing Season, but Future Changes
Possible,” BNA.com, June 5, 2014,
http://bit.ly/2HtFl5c). Accordingly, the
OVDP does not seem to be available to a
taxpayer who is solely reporting virtual cur-
rency transactions. The taxpayer may also
have an unreported foreign bank account that
has been used to receive funds related to vir-
tual currency transactions; in such a case, the
OVDP may be available to report not only
the existence of and income from the foreign
bank account but also the previously unre-
ported virtual currency transactions.

Virtual Currency, Real Consequences
Since 2014, the IRS has made clear its
position that the sale and exchange of virtual
currency is subject to tax, and any grace
period for reporting such transactions
appears to be coming to a close. Taxpayers
and their professional advisors should take
action to correct any previous nonreporting
of virtual currency transactions in a way
that will mitigate potential penalties. The
clock is ticking, and the IRS’s patience for
nonreporting seems to be running out. ❑

Sharon L. McCarthy, JD, is a partner at
Kostelanetz & Fink, LLP, New York, N.Y.

66 MAY 2018 / THE CPA JOURNAL