Governement report IRS lacks guidance VC

In a report from the Government Accountability Office (GAO) published on December 8, 2016, and publicly released on January 9, 2017, the IRS is called out for its lack of guidance in regard to taxpayers investing individual retirement accounts (IRA) in “unconventional assets,” including virtual currency.

According to the GAO, there are over 485,000 IRAs, worth approximately $49.7 billion, invested in unconventional assets, such as energy investments, equipment leasing, foreign-based assets, farming interests, precious metals, private equity, promissory notes (both secured and unsecured), real estate, and tax liens, as well as virtual currency. Investment in these types of assets might require an IRA owner’s role and responsibilities to expand in order to remain in compliance with tax laws. Taxpayers, however, may not be fully aware of how to comply with regulations. The GAO report highlights this lack of guidance by the IRS, stating:

“Current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and potential challenges associated with investing in unconventional assets. Targeted IRS guidance for these IRA owners may help them navigate the potential compliance challenges associated with certain types of unconventional assets.”

While it’s common for an IRA to be invested in a mutual fund of stocks, bonds, and money market securities, some individuals choose to invest in legitimate unconventional assets. However, if a taxpayer isn’t fully aware of the intricacies of the law, it’s possible that income generated from their IRA investments could jeopardize their favorable tax status, potentially leading to penalties. The GAO report states:

“Recent federal and state investigations and litigation have raised questions as to whether the investment in unconventional assets in retirement accounts may jeopardize these accounts’ tax-favored status and place account owners’ retirement savings at risk.”

This isn’t the first time the IRS has been criticized for its lack of guidance regarding virtual currency. In a report by the Treasury Inspector General for Tax Administration (TIGTA) dated September 21, 2016, the IRS was chastised for not providing meaningful virtual currency guidance to taxpayers. The IRS actually agreed with the recommendations in the TIGTA report, but cited their limited budget as an excuse for any delay with improving their tax guidance.

The GAO’s 56-page report included three recommendations for the IRS, with which the IRS generally agreed. The GAO recommended that the IRS (1) provide guidance to IRA owners on the potential for IRA transactions involving certain unconventional assets to generate unrelated business taxable income subject to taxation; (2) provide guidance to IRA owners and custodians on how to determine and document fair market value for certain categories of hard-to-value unconventional assets; and (3) clarify how to determine the fair market value of hard-to-value unconventional assets.

It’s unclear how much of the 485,000 IRAs are invested in Ether, Bitcoin, or other virtual currency, but the IRS obviously wants their slice of that valuable pie. If they don’t do their part and release easy to follow tax guidelines, they could jeopardize the livelihoods of thousands of Americans.

Jim Manning lives in Los Angeles and has been writing for websites for over five years, with a particular interest in tech and science. His interest in blockchain technology and cryptocurrency stems from his belief that it is the way of the future. Jim is a guest writer for ETHNews. His views and opinions do not necessarily constitute the views and opinions of ETHNews.
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