Several April tax updates on the tax information reporting front tantalise us as much on what is coming as they do on what is being said now.
The IRS confirmed in April that it is continuing work on the information reporting regulations for crypto transactions and proposed regulations are coming in the “near future”. The Biden Administration released the outlines of the American Families Plan, which proposes increasing the capital gains tax rate on households earning more than $1 million a year, as well as possibly enhancing tax information reporting requirements for financial institutions.
The IRS also released a memo on the taxability of virtual currency hard forks and has extended due dates on Qualified Intermediary certifications and periodic review waivers for this year.
- Alongside a couple of high-profile crypto enforcement efforts in courts, the IRS confirmed in April that tax information reporting regulations relating to virtual currency transactions may be released in proposed form in the near future.
- The Biden Administration’s American Families Plan contains proposals for raising the capital gains tax on high-income earners as well as language providing for enhanced information reporting requirements for financial institutions.
- A new IRS FAQ extends this year’s certification and periodic review waiver deadlines for Qualified Intermediaries.
1. Cryptocurrency tax enforcement
In April, a federal district court in Massachusetts authorised the IRS to serve a John Doe Summons to Circle Internet Financial Inc. or its predecessors or affiliates. This included cryptocurrency exchange Poloniex.
Concurrently, there is a separate case ongoing in a district court in California where the IRS is attempting to serve a similar summons to crypto asset exchange Kraken.
In both cases, the IRS is seeking customer account information from these exchanges as part of its efforts to enforce compliance with U.S. virtual currency tax laws.
These efforts hint at the potential importance of tax information reporting regulations that are currently being drafted by the IRS under section 6045 of the Internal Revenue Code.
Information reporting on virtual currency transactions (on a Form 1099-B, for example) would provide the IRS information upfront on taxpayer virtual currency transactions instead of requiring the IRS to engage in separate court actions to obtain taxpayer account information from various brokerages and exchanges.
In a tax conference sponsored by the Tax Reporting Group on 27 April and 28 April, the IRS confirmed that virtual currency transaction tax information reporting regulations are expected to be issued in the near future in proposed form. These regulations have been much awaited by industry participants since the IRS included them in its Priority Guidance Plan in 2019.
Separately, the IRS has released a memorandum from the Office of Chief Counsel (202114020) applying prior Rev. Rul. 2019-24 to state that the hard fork of Bitcoin in 2017 that created new virtual currency Bitcoin Cash was taxable to owners of Bitcoin.
Owners of Bitcoin would be taxed at the time they obtained dominion and control over the new Bitcoin Cash that resulted from the hard fork based on the fair market value of Bitcoin Cash at such time.
This tax treatment impacts cost basis determinations and has potential tax reporting impacts. We plan to discuss this further in a future blog.
2. American Families Plan
In April, the Biden Administration provided the outlines of the American Families Plan that include some $1.8 trillion in investments and tax credits for American families and children. In part to pay for the new expenditures, there are a number of “tax reform” items as well.
For investors, the headline news seems to have been that the tax rate for the highest ordinary income bracket is proposed to be raised to a pre-2017 rate of 39.6 percent and the capital gains tax rate for households earning more than $1 million per year would lose capital gains preference and obtain the same rates as ordinary income.
But the outlines of the plan also contained language relating to enhanced tax information reporting.
According to the plan fact sheet, the plan “would require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are”.
It is unclear though what form such information reporting may take. Investment income such as dividends and interest, as well as sales proceeds from the sale of securities is already subject to information reporting.
The plan fact sheet makes reference to a research paper published by the National Bureau of Economic Research that also argued for enhanced tax information reporting as a means to close the gap in tax collections.
But that paper appears to only mention one detailed tax information reporting change, namely lowering the threshold for Form 1099-K reporting by third party settlement organisations. Essentially, this would allow for increased reporting for certain independent contractor payments such as those for gig worker. That change though is already incorporated as part of the American Rescue Plan Act enacted into law in March.
It deserves monitoring if the American Families Plan would indeed impose additional tax information requirements on financial institutions.
3. Qualified Intermediary certification deadline extensions
The IRS also provided extensions to the deadlines for Qualified Intermediaries (QIs) and withholding foreign partnerships (WPs) and withholding foreign trusts (WTs) to submit their periodic certifications and periodic review wavier requests for the three-year certification period ending 31 December 2020.
According to FAQ 10 in the Certifications and Periodic Reviews section of the Qualified Intermediary FAQs website, the due date for periodic certifications of QI/WP/WTs that select 2018 or 2019 as their periodic review year or request a waiver of the periodic review requirement is extended until 1 December 2021. The original due date would have been 1 July 2021.
The due date for periodic certifications of QI/WP/WTs that selected 2020 as their periodic review year is extended until 1 March 2022. The original due date would have been 31 December 2021.
These extensions are automatic and do not require action on the part of the QI, WP or WT.
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