Inspector General Encourages IRS to Improve Virtual Currency Reporting

The Treasury Inspector General for Tax Administration (TIGTA) found in a recent audit that it is difficult for the IRS to identify taxpayers with virtual currency activity due to a lack of third-party information reporting that specifically identifies virtual currency transactions. TIGTA recommended that the IRS continue efforts to close the virtual currency information gap by issuing guidance clarifying the proper information reporting associated with virtual currency transactions.

Under current law, virtual currency exchanges are not required to report activity either to the IRS or to individual taxpayers, though some have voluntarily chosen to report certain disposals as “reportable payments” using Form 1099-K. The IRS stated that it is currently working with the Treasury Department to develop guidance on third-party reporting under IRC Sec. 6045 for certain taxable transactions involving virtual currency. Section 6045 requires “any person doing business as a broker” to report the gross proceeds from transactions:

(1)transfers securities of a customer for use in a short sale or similar transaction, and
(2) receives (on behalf of the customer) a payment in lieu of (A) a dividend, (B) tax-exempt interest, or (C) such other items as the Secretary may prescribe by regulations.

The reporting mechanism under Section 6045 is generally Form 1099-B, which any taxpayer with a conventional brokerage account would recognize. The IRS has released no guidance as to when (or if) a 1099-B reporting requirement will be imposed on virtual currency exchanges and trading platforms. The audit report (no. 2020-30-066) can be found at here.

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