🔒Businesses face new IRS scrutiny on cryptocurrency transactions

With new IRS regulations on the books, businesses that deal in cryptocurrencies are on notice that the government plans increased scrutiny of digital assets.

On May 20, the Treasury Department announced it would now require any crypto transfers valued at $10,000 or more to be reported to the IRS.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” said the Treasury statement. “Comprehensive reporting is necessary to minimize the incentives and opportunity to shift income out of the new information reporting regime.”

The Treasury Department cited estimates that the cryptocurrency sector had reached $2 trillion in market capitalization as of April of this year, recognizing some adoption by U.S. businesses — even as the values of individual tokens have swung wildly in recent months.

The IRS is also ramping up efforts to track alleged crypto tax cheats: Federal judges in Boston and San Francisco approved IRS summonses for records from two crypto exchanges in recent months, according to reporting by the Wall Street Journal. Customers with more than $20,000 in crypto transactions in any year from 2016 through 2020 were targeted by the actions.

The new IRS rules target businesses that accept and transact in virtual currencies and mark a shift in the focus of federal regulators, said Justin Wilcox, a CPA and partner in tax and advisory services at FML, an accounting firm based in Glastonbury.

“[Regulation] has mostly been geared toward individuals, and now they’re looking at businesses getting involved in the cryptocurrency space,” Wilcox said. “It’s an emerging issue, and now the U.S. Treasury is concerned that tax dollars are going to be hidden or missed because transactions are occurring in digital assets instead of U.S. dollars.”

FML works with local companies both transacting in cryptocurrencies like Bitcoin and Ethereum as payment, and those taking part in the crypto “ecosystem” by designing apps and software to facilitate transactions.

More Hartford-area businesses are signing on to the crypto economy, Wilcox said, with his small in-house crypto team inundated by questions from other accountants during the most recent tax season. Employees and contractors in Connecticut are also starting to ask for payment in virtual currencies, requiring interface with payroll and HR systems in addition to detailed reporting and valuation.

“It’s going from an exception to more mainstream gradually,” Wilcox said, adding he expects a much higher volume of crypto transactions in the 2021 tax year.

As an entrepreneur in the cryptocurrency ecosystem, New Haven-based consultant Bryant Eisenbach said he already reports his transactions in detail and doesn’t see the purpose of the new rule. As a client of Wilcox’s, he relies on expert advice to follow the rules.

“I don’t see the $10,000 reporting requirement as helping anything,” Eisenbach said. “You’re either following the rules already or you’re taking steps so you don’t have to follow them.”

The complexity of existing reporting rules around virtual currencies has already prompted many companies and crypto entrepreneurs to relocate to Puerto Rico or countries with less restrictive tax laws, Eisenbach said. Even so, many are sticking with cryptos despite recent volatility and the new government interest.

“We’re all fundamental believers — we’re working in technology and we’re just trying to live with the regulations and how unclear they can be at times and how onerous they can be at times,” Eisenbach said.

Combating misinformation

Increasing adoption, ongoing volatility in crypto values and the increasing complexity around the rules is forcing more companies to seek out expert advice, Wilcox said.

Wilcox said his personal interest in cryptocurrencies prompted FML to begin its practice in early 2018. Since then an increasing number of businesses have adopted some use of virtual currencies and need help navigating the tax implications. FML’s crypto advisory practice has grown with the demand, offering services unique for a regional firm.

“There’s a lot of misinformation or a lot of assumptions that could be made from just googling ‘What do I do about this,’ ” Wilcox said.

The blockchains that track cryptos post all of their accounting data, but the challenge is interpretation, he added.

“Classifying transactions appropriately and converting to the right currency — that stuff requires judgement, that stuff requires an understanding of the accounting and tax rules,” he said.

Businesses also need to carefully consider what they want to do with crypto assets: convert them quickly into more stable currency or hold on for the ride.

“How much exchange rate risk do they want to take on the cryptocurrency? Are they in the business of operating their core business or are they in the business of speculating on Bitcoin?” Wilcox said. “They’ll have to make the decision on a treasury basis of whether to warehouse that cryptocurrency effectively as inventory on their balance sheet or whether to convert it into U.S. dollars.”

With the recent volatility, businesses need to ensure they are taking in enough crypto to meet expenses.

“There’s no rush for businesses to jump in and speculate in crypto,” Wilcox said. “Be cautious about going away from your core business.”