Page 454 - TaxAdviser_2022

TAX CLINIC

and a proportionate share of proceeds such assets results in a taxable event at
from sales that occurred in February year end. Procedure & Administration
($0.00504730) must be excluded
from the total proceeds per share Future developments: Toward a IRS service issues
of BTC. For Investor A, this yields true ETF highlighted in national
a proceeds per share amount of While a true virtual currency ETF has taxpayer advocate report
$0.1988023: $0.21804604 (January yet to materialize on a U.S. exchange, While the IRS was able to promptly
through December 2020 gross sales per in 2021 alone companies including process 85% of returns in the
BTC) minus ($0.01419641 January Fidelity, WisdomTree, Cboe/VanEck, 2022 filing season and expedite
sales + $0.00504730 February sales) and SkyBridge Capital all filed its resolution of some of the most
= $0.1988023. Her pro rata BTC preliminary registration statements with common taxpayer errors, the Service’s
proceeds, multiplied by her total shares the SEC, which has denied or pushed backlog of paper-filed returns bogged
owned, gives Investor A’s total proceeds back every application to date. Even down further, National Taxpayer
for the year for the proportionate so, a handful of Grayscale’s current Advocate Erin Collins said in a report
share of BTC, which is $3,976.05: investment trusts, which were initially issued in June.
total proceeds of BTC sold on a pro sold through private offerings, have now Collins’s annual midyear report,
rata amount = $0.1988023 per share × entered regulated secondary markets, Objectives Report to Congress, for fiscal
20,000 shares = $3,976.05. and thus the complexity of year-end tax 2023 reviewed the IRS’s performance
To put this amount into a tax reporting for these products may now be in the 2022 tax filing season and
perspective, this is the sales price of the responsibility of less-sophisticated outlined 14 “systemic advocacy
the underlying virtual currency assets owners. Grayscale has even expanded its objectives” going forward. The report
the investor owned and disposed of product line and is now offering a DeFi also lists internal goals and objectives
for the year. Her cost basis for her (decentralized finance) fund, which for the Taxpayer Advocate Service
portion of the BTC sold to pay the according to its fact sheet holds a basket (TAS) Collins heads.
sponsor expenses, as calculated above, of nine underlying cryptocurrencies.
is $3,380.93. Thus, Investor A’s gain Depending on how the assets are being Paper-filed returns
on the BTC sold to pay the trust’s stored, and the fees being charged, such As of the end of May 2022, the 21.3
expenses is $595.12: total proceeds of a bundled fund may require multiple million paper tax returns the IRS had
$3,976.05 less total cost $3,380.93 = basis calculations to account for the still to process represented an increase
$595.12. differing coins, adding even more work of 1.3 million over the same point
So, for the investor, the proceeds to properly report annual transactions. in 2021, according to a news release
from the trust’s sale of BTC to pay Even without Grayscale, several accompanying the report.
expenses resulted in a capital gain of BTC ETFs are already trading “The IRS has said it is aiming to
$595.12. This amount is reported by in Canada on the Toronto Stock crush the backlogged inventory this
the taxpayer at year end and is taxed Exchange, opening up investors to year, and I hope it succeeds,” Collins
as capital gains at the appropriate rate the same calculations as Grayscale’s said in the release. “Unfortunately, at
based on her filing status and total trusts and the increasingly thorough this point the backlog is still crushing
taxable income. It is important to note reporting requirements imposed by the IRS, its employees, and most
that, although the taxpayer did not the IRS. As the mainstream adoption importantly, taxpayers.”
actively participate in this sale, she of cryptoassets continues in the To help the IRS reach its goal,
still has a tax responsibility attached United States, the likelihood of a true, Collins said, TAS will continue to
to its occurrence and must report it domestic cryptoasset-backed ETF, advocate that the IRS automate its
on her return. This example is pulled or several, becoming approved by the processing of paper returns, including
directly from the Grayscale Bitcoin SEC means the basis computation by adopting her directive in March
Trust tax information letter and more and expense analysis outlined in this that it implement 2-D barcoding on
fully articulated in that document. As item will become more common and tax forms. Others, including a group
the example shows, an investment in will create a corresponding need for of U.S. senators, have also commended
a virtual currency investment trust is education, similar to the arrival of the technology to the IRS.
much more involved than the typical cryptoassets themselves. “Although IRS leaders have
investment in mutual funds, or even From Jesse Benjamin, CPA, indicated they are not likely to
ETFs, and that even simply holding Queens, N.Y. implement 2-D barcoding, I strongly

14 September 2022 The Tax Adviser