IRS weighing trade-offs as it drafts digital currency tax rules

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The Internal Revenue Service has been considering different approaches to digital currency taxation, a top government official has revealed. Speaking during a recent event, the official stated that the agency has been weighing the different trade-offs each model offers.

Erika Nijenhuis, who serves as the senior counsel at the Treasury Department’s office of tax policy, was speaking at the OECD’s 2020 Global Blockchain Policy Forum, Bloomberg Law reports. She revealed that the IRS has a choice between an approach focusing on risk such as the international Common Reporting Standard or one that focuses on tax liabilities. The latter would require digital currency users to report transactions.

The Treasury official further revealed that the IRS has been weighing the burden each approach will put on related parties such as exchanges and traders. In addition, the agency has to consider the benefit each approach offers, such as enhancing compliance.

Nijenhuis stated, “There are trade-offs among all of them and we are hard at work thinking about all of those issues.”

Nijenhuis was joined on the panel by Lawrence Zlatkin, the vice-president of tax at U.S exchange Coinbase. Zlatkin urged the IRS to opt for the risk-focused approach. He argued that collecting large amounts of aggregate data will put a huge burden on exchanges but will offer little use when it comes to enforcing tax laws.

He stated, “You get tons of information, but more isn’t always better.”

Also on the panel was Lisa Zarlenga, a partner at Steptoe & Johnson LLP who also criticized the transactions reporting approach. According to Zarlenga, this approach will leave a heavy burden on the digital currency users. Even if exchanges will have to report aggregate information to authorities, individual taxpayers will still have a lot of calculations to do such as the total gains or losses on their digital currency holdings.

There is always going to be some level of compliance duty for the taxpayer,” she stated.

The IRS has continued to enhance its ability to tax digital currency holders. As CoinGeek reported a month ago, the agency issued guidance on who needs to disclose their digital currency activity. Those who have sold digital currencies, exchanged them for goods or used them to buy assets are among those who must report their activities to the agency.

The IRS also recently announced it would offer $625,000 to any individual that could create a tool to track Monero or Layer 2 network protocol transactions.

See also: U.S. Rep. Darren Soto’s keynote talk at CoinGeek Live, Balancing Innovation & Regulation for Growth of Blockchain Technology