This Client Alert highlights recent tax developments that may impact cryptocurrency and blockchain businesses. In particular, we discuss (1) IRS approval of a new compliance campaign, (2) possible IRS guidance relating to cryptocurrency transactions and (3) how the Supreme Court decision in South Dakota v. Wayfair, Inc. may impact token issuers.
1. IRS Compliance Campaign
On July 2, 2018, the IRS approved the Virtual Currency Compliance campaign. The director of the Withholding and International Individual Compliance practice will spearhead this campaign. Compliance campaigns are generally the IRS’s approach to identifying taxpayers who may not be adhering to tax laws, such as not reporting gains from bitcoin transactions. Given that this IRS practice group focuses on international tax matters, it is possible that the IRS will scrutinize U.S. trade or business issues and possible withholding issues related to air drops, hard forks and other cryptocurrency transactions. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical.
2. Forthcoming IRS Guidance
Recently, a senior attorney in the Office of Tax Policy stated at a New York State Bar Association conference that the IRS will attempt to publish guidance related to cryptocurrency transactions this year. Any guidance will be limited, but possible areas identified include initial coin offerings (ICOs) and hard forks. Currently, the only guidance on cryptocurrency transactions is a 2014 IRS Notice, which was published before ICOs and hard forks existed. Any new guidance may address these emerging issues.
3. Possible Impact of South Dakota v. Wayfair, Inc. on Blockchain
Last month, the Supreme Court ruled that states may impose sales tax on certain out-of-state businesses with in-state sales.1 Out-of-state businesses would generally need to have certain minimum contacts with the tax-imposing state, such as a minimum sales threshold, to be subject to a sales tax. Currently, several states are drafting amendments to their sales tax laws to require e-commerce businesses to collect and remit sales tax.
This will certainly impact e-commerce and may impact token sales. Each state’s sales tax is unique to that state, and one state may impose sales tax on goods or services that another state does not. It is possible that a state could impose sales tax on the sale or issuance of tokens. Currently, approximately twenty-seven states impose a sales tax on digital goods (e.g., audio or video downloads), although there is no uniform definition of digital goods across the states. It is possible that one or more states could impose sales tax on the sale of tokens and other digital assets. You should consult with your tax advisors to determine if your business may become required to collect sales tax.
For additional information about the taxation of cryptocurrencies, please contact Jon P. Brose (212-574-1615) or Brett R. Cotler (212-574-1269) or a member of Seward & Kissel’s Blockchain and Cryptocurrency Practice.
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1 South Dakota v. Wayfair, Inc. overturns Quill Corp. v. North Dakota and National Bellas Hess Inc. v. Department of Revenue of Illinois. The Quill and National Bellas Hess cases held that states could not require out-of-state vendors without any physical presence in the state to collect and remit sales tax on sales to residents in the state.
