NYAG Warns Investors of Tax Liability Associated with Virtual Currency Investments
Commentary by Jason Schwartz
New York Attorney General Letitia James warned digital asset investors to make sure they are complying with all applicable tax laws associated with their investment in digital assets.
In a taxpayer notice, the Attorney General reminded investors that the acquisition, sale or exchange of cryptocurrencies have consequences which may trigger tax liability including damages, interest and penalties. She advised investors to review IRS Notice 2014-21 and related DFT guidance which affirm that all virtual currencies are treated as property for U.S. federal tax purposes. As such, virtual currencies are taxed the same way as any other asset. She warned that failure to properly report income from investments in digital assets may carry civil or criminal penalties. She also noted that the same rules apply to retailers and purchasers using cryptocurrency as their source of exchange.
Ms. James also stated that, in light of the surge in investment in cryptocurrencies, "ensuring that taxpayers appropriately declare and pay taxes on cryptocurrency transactions" is a priority for her and her office. She encouraged whistleblowers to come forward with any information about noncompliance of taxpayers.
Commentary
Some crypto investors seem not to realize that converting one crypto token into another token or into fiat is treated as a taxable exchange that triggers gain or loss recognition. For example, I have seen several "flippers" caught off-guard when they realize that their swap of an appreciated fungible token or NFT into $ETH or another crypto token is a taxable event. That said, the guidance around many crypto transactions remains woefully inadequate, and what guidance exists is often very difficult to apply to real-world situations. Moreover, the AG office’s statement that crypto "is taxed in the same way as any other assets" is unhelpful, since different assets are taxed differently. Understandably, many taxpayers are concerned that reporting their crypto transactions in the context of the current legal morass opens them up to attacks by aggressive regulators. (See generally The Taxation of Decentralized Finance.)