Will Cryptocurrency still be considered property for U.S. Tax Purposes?
November 2, 2021 | Cryptocurrency, Department of Justice, IRS
As popularity for cryptocurrency continues to grow, the conversation of how to apply tax laws to different crypto situations will be on the rise as well. In a new response filed by the Department of Justice (“DOJ”), cryptocurrencies or virtual currencies are not considered property for U.S. tax purposes. This comes as a stark contrast to IRS Notice 2014-21 which has been used as a guide when it comes to taxing virtual currencies. This claim was filed in a formal answer by the DOJ to a complaint issued in May of this year by Joshua and Jessica Jarrett in Case No. 3:21-cv-00419.
Background on Case No. 3:21-cv-00419
The couple filed a complaint with the U.S. District Court for the Middle District of Tennessee on May 27, 2021. They claimed mining cryptocurrencies, specifically Tezo coins, are not taxable until they have been traded and become property. As a result, they sought a refund from the IRS for income taxes paid in 2019. This claim cites IRS Notice 2014-21, which details how these currencies are viewed by the IRS and answers common questions about the taxation of cryptocurrencies. In this notice the IRS states for U.S. tax purposes, cryptocurrency is viewed as property and general tax principles observed for property transactions apply to virtual currency as well.
Read our blog post for more information about how cryptocurrency is taxed.
On August 27, the DOJ filed a formal answer to the complaint and stated that the United States denies that virtual currency is in all instances property for the purpose of U.S. tax law. Which goes against IRS Notice 2014-21, Revenue Ruling 2019-24, and FAQs published to the IRS website. With this take by the DOJ, whose purpose is to enforce the nation’s tax laws through criminal and civil litigation, clarification is needed on how companies and individuals should approach taxation of their crypto gains.
Potential Implications of DOJ’s Response
While U.S. cryptocurrency miners anxiously awaited an IRS response to the DOJ decision, taxpayers who extended in hopes of getting an answer before October 15th had to file their 2020 tax returns. A change to IRS Notice 2014-21 to omit crypto mining gains from income could mean large refunds for prior open tax years, a situation the IRS may not want to deal with.
As a store of value, cryptocurrencies have been outperforming every other investment vehicle over the past few years. Thus, a change in IRS opinion would also make the cost to benefit of crypto mining more advantageous. With the high barriers to entry due to the costs of computing power required, a change in how mining gains are taxed could lead to more players in the crypto mining space.
Contact the Probity Tax Recovery Team
As litigation continues, the PTR team will monitor guidance released by the DOJ and the IRS on these matters to provide more insight. In the meantime, please reach out to us if you have any questions about your crypto investments and transactions from a tax standpoint. We will work with you and your tax preparer to ensure all forms are filed accurately and efficiently.