Photo credit: Igor Faun
New York Attorney General Letitia James issued on March 23, 2022, a warning to virtual currency investors and their tax advisors to make sure that they accurately declare and pay taxes on their virtual investments. Deliberate or reckless failure to properly declare and pay taxes on cryptocurrency transactions may constitute civil or criminal violations of the tax law, as well as violations of tax provisions of the New York False Claims Act, which could result in steep financial liabilities. As the tax filing deadline approaches, Attorney General James encourages crypto investors to consult and follow guidance from the Department of Taxation and Finance (DTF) and the Internal Revenue Service (IRS) to accurately file their taxes and avoid penalties.
IRS and DTF Guidance on Cryptocurrency Taxability
Recently there has been a dramatic surge in the production, sale, and acquisition of “virtual” or “crypto” currencies such as Bitcoin and Ethereum. Transactions involving the acquisition, sale or exchange of cryptocurrency have tax consequences which may trigger tax liability. As set forth in IRS Notice 2014-21 and related DTF guidance, convertible virtual or cryptocurrency is treated as property rather than a currency for U.S. federal tax purposes. Therefore, general tax principles applicable to property transactions apply to transactions using virtual currency. This means that virtual currency is taxed in the same way as any other assets, such as stocks and gold.
Additionally, the IRS notes that taxpayers who receive “virtual currency as payment for goods or services, must, in computing gross income, include the fair market value of virtual currency, measured in US dollars, as of the date that virtual currency was received.” An exchange of virtual currency for other property results in either a gain or loss that must be reported by taxpayers. For example, taxpayers must calculate and report any gain or loss when using cryptocurrency to purchase a luxury electric vehicle, a plane ticket, or even a cup of coffee.
Finally, retailers and purchasers spending or accepting cryptocurrency need to be aware that DTF guidance makes clear that sales tax is owed on transactions involving the use of convertible virtual currency to pay for taxable goods or services delivered in New York state.
Taxpayers should carefully review this guidance and other principles set out in the IRS and DTF guidance in determining tax due on their cryptocurrency transactions.
Consequences of Failure to Pay Taxes on Cryptocurrencies
The consequences of a taxpayer’s failure to properly report income derived from transactions involving cryptocurrency are potentially far-reaching and severe. Such failure may carry significant civil or criminal penalties and can, in certain instances, result in criminal prosecution. Further, a deliberate or reckless failure to comply with the federal and state reporting obligations involving cryptocurrency may also result in taxpayer liability under the New York False Claims Act, which carries with it triple damages, interest, and penalties.
New York False Claims Act liability may also extend to tax professionals advising clients about the taxability of cryptocurrency transactions. For example, advisers that knowingly or recklessly make or cause to be made a false statement material to a taxpayer’s obligation to pay tax may be liable under New York law.
Ensuring that taxpayers appropriately declare and pay taxes on cryptocurrency transactions is a priority for the attorney general. Attorney General James encourages whistleblowers to come forward with any information about noncompliance.
Anyone with information relating to a taxpayer’s willful failure to report income or collect sales tax on transactions involving cryptocurrency are urged to report such failure to the Office of the Attorney General using the online whistleblower portal.
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