Dozens of hedge funds investing billions of dollars in cryptocurrencies don’t know if they’re calculating their taxes correctly, which may be a problem now that U.S. authorities have said they’re going to be scrutinizing virtual currencies. Just like individual taxpayers, institutional investors that have plunged into Bitcoin, Ether and other digital currencies are finding there are few guidelines governing their holdings, and those that exist are murky.
As a result, many funds have tried to minimize their liabilities without really knowing what the rules are. That could all come to a head later this year, following an announcement by the Internal Revenue Service in July that virtual currencies would be a focus of audits for its large business and international division.
The new batch of crypto funds could face bigger tax bills, or even penalties. “There is still a lot of uncertainty about how the IRS will come down on virtual currency,” said Clay Littlefield, a tax attorney for Alston & Bird in Charlotte, North Carolina.
“There are some good arguments for why this analogy or that analogy should apply, but there’s not a lot there.” Part of the problem stems from how slow regulators have been to define their views of virtual currencies. The IRS considers them to be property rather than currency.
The Commodity Futures Trading Commission says they’re commodities, which could open up some tax advantages if the IRS agrees. When the IRS added virtual currencies to its list of “compliance campaigns” last month, it said taxpayers with unreported transactions should correct their returns but that it wasn’t contemplating a voluntary disclosure program, which lets taxpayers limit their criminal and civil liabilities for breaking the rules. Read more from fortune.com…
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