Key Takeaways
- Two bills try to resolve longstanding questions about how to source some cryptocurrency operations across international boundaries.
- A new bill in the Senate would require Treasury to consider the location of personnel as well as computing facilities used to encrypt crypto transactions.
- These issues mirror the intangibles valuation problems that have vexed tax authorities in most tech fields.
- IRS agent claims retaliation.
- New international tax regulations raise concerns among practitioners, business groups.
Since cryptocurrency use exploded more than a decade ago, practitioners have wrestled with its tax treatment. The small amount of guidance from the Department of the Treasury has left much to be speculated—or, in some cases, guessed.
In some ways, the international-specific issues are similar but exaggerated versions of those facing companies in the technology field generally. For instance, many tech companies have intangible assets that contain immense value. But for crypto firms, the value and product itself is an intangible asset. And while many tech intangibles can be difficult to pin down to a particular country as they are produced and exploited in a global network that’s largely online, cryptocurrencies are recorded on a blockchain—an open-sourced ledger that entirely exists online.
Despite these issues, for most cryptos the international issues are relatively simple to work out. Treasury released its first crypto guidance in 2014, specifying that they would be considered as property rather than currency, with normal property rules applying. This established that they would be considered as located in the residence of the owner, for purposes such as capital gains tax or reporting. For most people, a residence is pretty clear and difficult to manipulate.
But it gets more complicated for a crypto business, whether it’s owned by a person or organized as a corporation. Some operations earn income by completing mathematical puzzles with immense computing networks to record new encrypted crypto transactions on the blockchains, a process known as mining. Staking is an alternative, whereby new transactions are recorded by setting aside existing crypto units. Both present challenges for tax authorities, including determining how to recognize the income they generate and deciding who gets the right to tax it first.
The Digital Asset Tax Certainty Act, passed by the House Ways and Means Committee last month, states that income from “digital asset validation supporting activities” would be considered foreign if it is done through a qualified business unit located offshore—with pre-existing rules on QBUs and foreign branches applying.
The Aligning Digital Assets with Principles of Taxation Act (ADAPT) Act, released last week by Sen. Steve Daines, R-Mont., includes similar language but adds a wrinkle. It grants Treasury the authority to issue regulations determining the correct source of mining income, taking into account “the location and relative contributions of the computing equipment used in the mining activity," and "the location of personnel performing functions with respect to the operations, management or maintenance of such equipment." It grants Treasury the authority to consider other factors as well.
That would be a powerful tool for the executive branch to resolve these sourcing issues. But it also gets Treasury involved in some of the same tricky technological questions which have flummoxed authorities trying to evaluate intangible assets in other industries. In some cases it may be a straightforward inquiry, but in others it may require evaluating complex equations, massive computing facilities, and operations across multiple jurisdictions (as well as dozens of employees who could be located elsewhere).
These sourcing issues are separate from the question of when to tax mining and staking income, which both bills have left out due to a lack of agreement among lawmakers.
Congress will have to tackle these House and Senate bills during the packed lame duck session beginning in mid-November. Resolving these issues and getting something to President Trump's desk will no doubt be a source of tension during the winter months.
Noteworthy Items This Week
“The unauthorized disclosure of a federal law enforcement officer’s protected personnel and disciplinary information by his own agency to unauthorized individuals, which disclosure necessarily conveyed tax return information in violation of 26 U.S.C. section 6103, amounts to felony misconduct,” the complaint in Visalli v. IRS states.
IRS Special Agent Brian J. Visalli, a 24-year veteran of the agency’s Criminal Investigation division, names the IRS and Treasury as defendants in the complaint filed October 2 in the U.S. District Court for the Northern District of Illinois.
Groups Want Treasury to Ease Limit on Foreign-Derived Income – Michael Rapoport, Bloomberg Tax ($):
But that specification would exclude some companies from benefiting from the FDDEI deduction, by excluding significant parts of the kind of export income intended to be included in FDDEI, the National Association of Manufacturers said in a comment letter to the IRS released Tuesday.
The move would go beyond what the law requires to “impose an additional limitation that undermines the overarching purpose of the provision,” the NAM said..
NCTI Proposed Regs Leave Foreign Tax Deductions in Limbo – Chandra Wallace, Tax Notes ($):
Wei Fan of Grant Thornton Advisors LLC said the proposed regs “provide several examples of deductions that are not directly allocable and only a limited number of examples that are.” Those examples fall at both ends of the spectrum but don’t address what to do with the many foreign tax deductions that fall in the middle, she told Tax Notes.
Int'l Tax In September: Facebook Ruling, BEAT Bill And More – Molly Moses, Law360 Tax Authority ($):
The BEAT generally operates as a minimum tax that covers certain deductible, base-eroding payments large corporations make to foreign related parties. The U.S. Innovation and Global Competitiveness Act, introduced by Rep. Ron Estes of Kansas, would narrow when the BEAT applies to intercompany payments made overseas.
Estes said the bill keeps in place protections against profit shifting "while making sure U.S. job creators aren't hit with double taxation or penalized for routine business payments that don't erode our tax base."
The revised revenue projections raise several questions, chiefly: Why were expectations so inflated, and are the costs that countries will need to continue to invest in taxpayer compliance and enforcement worth the gains?
Public Domain Superhero of the Week
Every week, a new character from the Golden Age of Comics, who’s fallen out of use.
This week’s entry: Wonder Man
Debut Year: 1939
Debut Publication: Wonder Comics #1
Origin Story: A world-traveling radio engineer, he was granted a magic ring in Tibet after a yogi determined he had physical and moral strength.
Superpowers: Invulnerability, super-strength, and huge leaping skills. (And no doubt more would have been revealed, had DC Comics not sued for infringing on the Superman copyright and prevented Wonder Man from appearing in a second issue.)
Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.
