Since the issuance of IRS Notice 2014-21. crypto assets have been taxed as property (see page 82). with gains and losses taxed at applicable capital gains rates.
The IRS did not require cryptocurrency exchanges to provide form 1099-B to disclose gains and losses, but instead obligated individuals to self-report; a fraction of the expected number of taxpayers reported gains and losses from cryptocurrency trading.
After litigation. Coinbase agreed to turn over a limited subset of data requested by the U. S. government related to 14.356 Coinbase users who transacted over $20,000 in either USD or crypto assets between 2013 and 2015. This signaled to the market that increased attention on tax reporting is expected to continue, whether bolstered by further summonses for data to be used by the IRS for enforcement or otherwise.
The result of this increased attention is likely to be a wave of crypto traders disclosing taxable gains and losses and potentially restating their prior years taxes to include undisclosed gains. Assessment of penalties, enforced collection actions, placement of tax liens and possible prosecutions of those traders may follow.
But taxpayers may benefit from clarity as to certain frequently criticized
Aspects of the IRS guidance applicable to crypto assets. There is no guidance to suggest whether crypto-to-crypto trading qualifies for deferred taxation through 1031 exchanges. As property, crypto assets must be valued at the fair market value in each transaction, but the current guidance suggests that markets should be used for valuation, even though the markets providing crypto asset trading liquidity are unregulated and manipulated, and the various markets around the world tend to vary materially in asset pricing at any given time.
In the relatively short history of cryptocurrencies, regulators have approached these assets by attempting to enforce the laws as they exist In the course of so doing, lawmakers have come to understand the unique features and implications of these systems and will likely begin to focus on enforcement while seeking to adapt existing laws and to explore gaps in their respective regulatory regimes. It is an effort to protect consumers and bring order to markets.