IRS Touts Improved Customer Service in 2023 Tax Season The Internal Revenue Service said it delivered "significantly improvedcustomerservice" during the 2023 tax filing season and cited funds made available to it from the Inflation Reduction Act...
CA - Tax relief announced for storm victims in Modoc County The IRS has announced tax return filing and payment relief for individuals and businesses in Modoc County affected by the severe winter storms, straight-line winds, flooding, landslides, and mudslides...
Proposedregulations spell out the criticalmineral and batterycomponentrequirements of the newclean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRSguidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16.
Proposedregulationsspell out thecriticalmineralandbatterycomponentrequirementsof thenewclean vehicle credit, while also clarifying several othercomponentsof the credit. Theproposedregs, along with modifiedFrequently Asked Questionson theIRSwebsite, largely adopt previousIRSguidance, including Rev. Proc. 2022-42,Notice 2023-1, andNotice 2023-16. Similarly, thecriticalmineralsandbatterycomponentregs largely adopt theWhite Paperthe Treasury Department released last December.
However, theproposedregs also:
detail the income and price limits on the credit,
prohibit multiple taxpayers from dividing the credit for a single vehicle, and
coordinate the credit with other credits.
The regs are generallyproposedto apply to vehicles placed in service after April 17, 2023, but taxpayers may rely on them for vehicles placed in service before that date. Comments are requested.
CriticalMineralsRequirement
For purposes of the $3,750 credit for a qualified vehicle that satisfies thecriticalmineralsrequirement, theproposedregs provide a three-step process for determining the percentage of the value of the applicablecriticalmineralsin abattery:
1. Determine the procurement chain for eachcriticalmineral.
For vehicles placed in service in 2023 and 2024, theproposedregs consider acriticalmineralto meet the test if at least 50 percent of the value added by extracting, processing or recycling themineralis due to extraction, processing or recycling in the U.S. or a country with which the U.S. has a free trade agreement in effect. Theproposedregs identify the following countries as ones with a free trade agreement in effect with the U.S.: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The regs also propose criteria for identifying additional countries, such as the factors that are part of theCriticalMineralsAgreement (CMA) the U.S. recently entered into with Japan.
BatteryComponentRequirement
For purposes of the $3,750 credit for a qualified vehicle that satisfies thebatterycomponentsrequirement, theproposedregs provide a four-step process for determining the percentage of the value of thebatterycomponentsin abattery:
1. Identifycomponentsthat are manufactured or assembled in North America.
2. Determine the incremental value of eachbatterycomponentand North Americanbatterycomponent.
3. Determine the total incremental value ofbatterycomponents.
4. Calculate the qualifyingbatterycomponent.
MAGI Limit
The credit does not apply if the taxpayer’s modified adjusted gross income (MAGI) for the credit year or, if less, the previous year exceeds a limit based on filing status. Theproposedregs clarify that if the taxpayer’s filing status changes during this two-year period, this test applies the MAGI limit for each year based on the taxpayer's filing status for that year.
Theproposedregs also clarify that the MAGI limit does not apply to a corporation or any other taxpayer that is not an individual for which AGI is computed underCode Sec. 62.
MSRP Limits
A vehicle does not qualify for the credit if the manufacturer’s suggested retail price (MSRP) exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle. Theproposedregs adopt the vehicle classification system theIRSannounced inNotice 2023-16. This is the vehicle classification that appears on the vehicle label and on the websiteFuelEconomy.gov. The regs also provide a more detailed definition of"MSRP"using information reported on the label affixed to the vehicle’s windshield or side window.
Vehicle with Multiple Owners
Theproposedregs generally prohibit any allocation or proration of the credit if multiple taxpayers place a vehicle in service. However, a partnership or S corporation that places a vehicle in service may allocate the credit among its partners or shareholders. The MAGI limits on the credit apply separately to each individual partner or shareholder. The seller’s report for the vehicle lists the entity’s name and TIN.
Final Assembly in North America
To qualify for the credit, the final assembly of anewclean vehicle must occur in North America. Theproposedregs reiterate earlierguidanceon thisrequirement, but they also provide more detailed definitions of"final assembly"and"North America."Taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN), or the final assembly point reported on the label affixed to the vehicle. Taxpayers may also continue to rely on the information in the"VIN decoder sites"athttps://afdc.energy.gov/laws/electric-vehicles-for-tax-creditandhttps://www.nhtsa.gov/vin-decoder.
Coordination with Other Credits
While thenewvehicle credit is generally a nonrefundable personal credit, the credit for a depreciable vehicle is treated as part of the general business credit. If the taxpayer’s business use of a qualified vehicle is less than 50 percent of its total use, theproposedregs require the taxpayer to apportion the credit. Only the portion of the credit that corresponds to the percentage of the taxpayer’s business use of the vehicle is part of the general business credit; the rest of the credit remains a nonrefundable personal credit.
Theproposedregs clarify that when thenewclean vehicle creditis allowed for a particular vehicle, a subsequent buyer in a later tax year may still claim the usedclean vehicle credit. However, a subsequent buyer cannot claim the commercialclean vehicle credit.
Effective Dates
Taxpayers may rely on theproposedregulationsbefore they are published as final regs, provided the taxpayer follows them in their entirety and in a consistent manner. The regs are generallyproposedto apply tonewclean vehicles placed in service after April 17, the date the regs are scheduled to be published in the Federal Register.
Comments Requested
TheIRSrequests comments on theproposedregs. Comments may be mailed to theIRS, or submitted electronically via the Federal eRulemaking Portal athttps://www.regulations.gov(indicateIRSandREG-120080-22). Written or electronic comments and requests for a public hearing must be received by June 16, 2023.
In particular, theIRSseeks comments on the followingissues:
1. thecriticalmineralandbatterycomponentrequirements, including the distinction between processing of applicablecriticalmineralsand manufacturing and assembly ofbatterycomponents, and related definitions;
2. the 50-percent value added test forcriticalminerals, and the best approach for adopting a more stringent test after 2024;
3. the list of countries with which the United States has free trade agreements in effect,proposedcriteria for identifying other such countries, and other potential approaches; and
4. whether rules similar to those provided for partnerships and S corporation should apply to trusts and similar entities that place a qualified clean vehicle in service.
The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deductR&Eexpenses that the taxpayer failed to deduct when they were paid or accrued.
TheIRSis obsoletingRev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023.Rev. Rul. 58-74 generally allows a taxpayer that adopted theexpensemethod for research and experimental (R&E)expensesto use a refund claim or amend a return todeductR&Eexpensesthat the taxpayer failed todeductwhen they were paid or accrued.
Rev. Rul. 58-74 conflicts with current procedures for accounting method changes.
TCJA Changes forR&EExpenses
The decision to obsoleteRev. Rul. 58-74is unrelated to the changes made by the Tax Cut and Jobs Act (TCJA) (P.L. 115-97), even though the ruling relates topre-TCJAaccounting methods forR&Eexpenses.
Taxpayers could elect to amortizeR&Eexpensespaid or incurred in tax years beginning before 2022, ordeductthem currently. If the taxpayer did not make either election, theexpenseshad to be capitalized. A taxpayer that elected theexpensemethod had to use it for all qualifyingexpensesunless theIRSconsented to a different method for some or all of theexpenses.
TCJA ended theexpenseelection forR&Eexpensespaid or incurred in tax year beginning after 2021. Instead, theexpensesmust be amortized over five years (15 years for foreignexpenses).
Rev. Rul. 57-74 and Change of Accounting Method Procedures
TheIRSis obsoletingRev. Rul. 58-74because it includes insufficient facts to properly analyze whether the taxpayer’s failure todeductcertainR&Eexpenditures, such as thecostof obtaining a patent, when it deducted otherR&Eexpenditures, constituted a method of accounting or an error.
For example,Rev. Rul. 58-74 does not explain whether the taxpayer consistently treated the costs of obtaining a patent in determining its taxable income. It also fails to describe the cause and extent of the deviation in the treatment ofcertainR&Eexpendituresthat were not deducted.
In addition, filing an amended return, refund claim, or administrative adjustment request (AAR) underRev. Rul. 58-74 is inconsistent with theIRSposition that a taxpayer may not, without prior consent, retroactively change from an erroneous to a permissible method of accounting by filing amended returns.Rev. Rul. 58-74 is also inconsistent with the procedures for accounting method changes that qualify for automaticIRSconsent.
Prospective Application of Decision to ObsoleteRev. Rul. 58-74
files the refund claim, amended return or AAR no later than July 31, 2023;
(2)
is claiming adeductionfor anR&Eexpensethat is eligible for thepre-TCJAexpenseelection; and
(3)
is using theexpensemethod for other suchR&Eexpenses.
However, eligibility to rely onRev. Rul. 58-74 does not imply that theIRSwill grant the refund,deduction, or AAR. Instead, theIRSwill continue to challenge the applicability ofRev. Rul. 58-74 when appropriate. For example, theIRSmight challenge reliance onRev. Rul. 58-74 when the taxpayer’s facts are distinguishable fromRev. Rul. 58-74, including where the taxpayer failed to adopt theexpensemethod underpre-TCJAlaw.
The IRS has issuedsafe harbordeedlanguage that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0Act of 2022.
The IRS hasissuedsafe harbordeedlanguagethat may be used to amend eligible easementdeedsintended to qualify forconservation contributiondeductions underCode Sec. 170(f)(3)(B)(iii), to comply with changes to thelawcreated by section 605(d) of theSECURE 2.0Actof 2022. If a donor substitutes the prescribedsafe harbordeedlanguagefor the correspondinglanguagein the original eligible easementdeed, and the amendeddeedis then signed by the donor and donee and recorded on or before July 24, 2023, the amended eligible easementdeedwill be treated as effective for purposes ofCode Sec. 170and section 605(d)(2) of theSECURE 2.0Act. If these requirements are met, the amendment must be treated as effective from the date of the recording of the original easementdeed.
The following are not considered an"eligible easementdeed"for purposes of thissafe harbor- any easementdeedrelating to any contribution:
which is not treated as aqualified conservation contributionby reason ofCode Sec. 170(h)(7);
if a deduction underCode Sec. 170has been disallowed, the donor has contested such disallowance, and a case is docketed in federal court to resolve this dispute scheduled on a date before the date the amendeddeedis recorded by the donor; or
if a claimed contribution deduction underCode Sec. 170resulted in an underpayment penalty under eitherCode Sec. 6662or6663, and such penalty has been finally determined administratively or by final court decision.
If thesafe harborlanguageis substituted according to the requirements spelled out in thisNotice, the amended eligible easementdeedwill be treated as effective as of the date the eligible easementdeedwas originally recorded for federal purposes, regardless of whether the amended eligible easementdeedis effective retroactively under the relevant statelaw.
The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.
The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.
The IRS has compiled a list of 12 scams and schemes that put taxpayers and tax professionals at risk. Some of them are:
micro-captive insurance arrangements: is an insurance company whose owners elect to be taxed on the captive's investment income only;
syndicated conservation easements: are arrangements wherein they attempt to game the system with grossly inflated tax deductions;
offshore accounts & digital assets: unscrupulous promoters lure taxpayers into placing their asssets in offshore accounts under the pretense of being untraceable by the IRS;
maltese individual retirement arrangements misusing treaty: are arrangements wherein the taxpayers attempt to avoid tax by contributing to foreign individual retirement arrangements in Malta; and
puerto rican and other foreign captive insurance: are transactions wherein the business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which they have a financial interest.
Taxpayers are adviced to to rely on reputable tax professionals they know and trust to avoid such schemes. The IRS has also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPE) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.
As part of the Dirty Dozen awareness effort, the IRS encourages people to report taxpayers who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. To report an abusive tax scheme or a tax return preparer, taxpayers should mail or fax a completed and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. The postal address is: Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135.
As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.
As part of the annual Dirty Dozen taxscamseffort, theIRSand the Security Summit partners have urgedtaxpayersto be on the lookout forspearphishingemails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.
Cyber SecurityTipsto PreventSpearphishing
Spearphishingis a tailored phishing attempt to a specific organization or business and usually begins with a suspicious email that may appear as a tax preparation application or another e-service or platform. Some scammers will even use theIRSlogo and claim something like"Action Required: Your account has now been put on hold."Often these emails stress urgency and will ask tax pros or businesses to click on links to input or verify information.
How to preventspearphishing:
Never click suspicious links.
Double check the requests with the original sender.
Be vigilant year-round, not just during filing season.
TheIRSand its Security Summit partners continue to seespearphishingattempts that impersonate a new potential client, known as theNew Clientscam. Lastly,taxpayersshould never respond to tax-related phishing or spearfishing or click on the URL link. Instead, thescamsshould be reported by sending the email or a copy of the text/SMS as an attachment tophishing@irs.gov.
The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.
The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.
"Given the historic low levels of IRS taxpayer services, we are concerned that there was an insufficient allocation of funding to improve taxpayer services to appropriate levels"theAICPAMarch 28, 2023, letter to the IRS and the Department of the Treasury states, noting that the COVID-19 pandemic"made it painfully clear that the IRS was not funded to accomplish all its responsibilities."
AICPAargued that the agency’s service deficiencies"prevent taxpayers from complying with their tax obligations and hamper our members’ ability to as professional advisors to do their jobs, which is to help these taxpayers comply."
And despitefundsbeing targeted toward enforcement and a stated goal of ensuring that wealthy individuals and corporations are paying their fair share of taxes,AICPAstates that"enforcement actions must be in balance with the services the IRS provides to taxpayers."
The Inflation Reduction Act allocates $45.6 billion to enforcement activities and only $3.1 billion to service, and theAICPAsuggested that more money be focused on service-related issues, including allocating sufficientfundsfor employee training to help replace the institutional knowledge that is expected to be lost in the coming years as the aging workforce retires.
AICPAis also calling on the IRS to develop a comprehensive customer service strategy, including creating more empowered employees; better access to timely information; and access to tailored resources, including resources designed specifically for tax professionals.
Additionally, the organization recommended that the agency develop a comprehensive plan to redesign the agency, including adopting a more customer-focused culture; integrating its technical infrastructure so the disparate legacy systems can communicate with each other; and creating a practitioner services division"that would centralize and modernize its approach to all practitioners."
Finally,AICPArecommended that IRS continue with its business systems modernizations initiatives.
"Currently, the IRS has two of the oldest information systems in the federal government making the information technology functions one of the biggest constraints overall for the IRS"the letter states."Without modern infrastructure, the IRS is unable to timely and efficiently meet the needs of taxpayers and practitioners. … We recommend that the IRS more fully explore options to allocateIRAenforcement funding to BSM issues."
Automated Collection Notices To Resume
Another area that the organization recommends thefundsbe used for is the ongoing effort by the agency to reduce the backlog of unprocessed paper tax returns and other paper correspondence.
AICPAacknowledged the work done to reduce levels after the backlog spiked during the pandemic, but stated that"more needs to be done to ensure that taxpayers and practitioners are not faced at any time in 2023 with yet another year with significant levels of unprocessed returns, leading to additional delays in processing and incorrect notices and penalties."
And while this is going on, the organization recommends that the IRS"continue the suspension of certain automated collection notices until it is prepared to devote the necessary resources for a proper and timely resolution of matters. Until the IRS can respond to taxpayer replies to notices in a timely manner, these collection notices should not be restarted."
According to the letter, the agency is planning on restarting automated collection notices in June 2023, even though"this June date has not been widely publicized. The IRS should communicate the stat date of automated collection action to the public, specifically identifying what actions will be part of this process and providing resources for taxpayers on dealing with these actions."
Additionally, the organization is calling for"a streamlined reasonable cause penalty waiver without requiring a written request, similar to the procedures of the FTA administrative waiver, based solely on the pandemic’s effects on both the taxpayer and the practitioner."
National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.
National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.
"This is agame changerto transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve,"Collins wrote in an April 6, 2023, blog post about the plan.
However, she reiterated criticism over how thefundswould be allocated throughout the next 10 years. TheIRAallocates only $3.2 billion going to taxpayer services and $4.8 billion allocated to business system modernization, two areas that are in need of funding to help improve the service the agency provides to taxpayers.
"Combined, that’s just ten percent of the total,"she noted."By contrast, 90 percent was allocated for enforcement ($45.6 billion) and operations support ($25.3 billion). The additional long-term funding provided by theIRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer services and IT modernization."
Collins also cited the report in stating that thefundsallocated for taxpayer services will be depleted within four years and cautioned that the agency needs to ensure thatfundsare continually being allocated for this specific purpose beyond that point.
"Although I share the long-term vision of theSOP, I want to caution that the IRS should not lose sight of its core mission and its immediate challenge of reducing the large backlog of amended returns and taxpayer correspondence."
On April 4, 2023, the Internal Revenue Service released the StrategicOperatingPlan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.
On April 4, 2023, theInternal Revenue Servicereleased theStrategicOperatingPlan, which details the agency’splansto use Inflation Reduction Act resources to transform the administration of the tax system andservicesprovided to taxpayers.
The goal of the changes outlined in theStrategicOperatingPlanis to"provide taxpayers with world-class customerservice"andreducethedeficitby"hundreds of billions by pursuing tax evasion by wealthy individuals, big corporations, and complex partnerships,"said Deputy Secretary of the Treasury Wally Adeyemo.
TheStrategicOperatingPlanis organized around five key objectives:
Dramaticallyimproveservicesto help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
Quickly resolve taxpayer issues when they arise.
Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
Deliver cutting-edge technology, data, and analytics to operate more effectively.
Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
Theplanoutlines a series of initiatives and projects aligned to each objective, including 42 key initiatives, 190 key projects, and more than 200 specific milestones designed to achieve the objectives set forth by theIRS.
Improved customerservice, compliance efforts, and technology updates are also essential to achieving the goals set forth in theStrategicOperatingPlan.
With long-term funding in place, theIRShas hired more than 5,000 phone assisters, increased walk-inserviceavailability, and added new digital tools, according toIRSCommissioner Daniel Werfel.
"In the first five years of the 10-yearplan, taxpayers will be able to securely file documents and respond to notices online,"said Werfel. Taxpayers will also be able securely access and download account data and account history."For the first time, theIRSwill help taxpayers identify potential mistakes before filing, quickly fix errors that could delay their refunds, and more easily claim credits and deductions they may be eligible for,"he said.
TheStrategicOperatingPlanalso includes targeted efforts to ensure fair tax law enforcement and compliance with existing laws. Theplanfocuses on"areas where compliance has eroded the most,"specifically compliance issues involving"wealthy individuals, complex partnerships, and large corporations,"said Werfel. TheIRSwill increase hiring efforts for experienced accountants and attorneys to ensure enforcement"at the top."Werfel further noted that theIRSdoes not intend to increase the audit rate for small businesses or households making less than $400,000.
Finally, theStrategicOperatingPlanutilizes Inflation Reduction Act funding to modernize the agency’s technology infrastructure to protect taxpayer data. In the first five years of the 10-yearplan, theIRSaims to eliminate paper backlogs that have delayed taxpayer refunds by digitizing forms and returns when they are received and transitioning to fully digital correspondence processes.
"Thisplanis only the beginning of our work,"Werfel said."This is a unique opportunity for theIRSand the nation, and we will continue to work closely with our partners as this effort moves forward. This investment in theIRSis already helping taxpayers this tax season, and thisplanshows that historic changes are coming."
The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digitalassetlosses affect tax obligations.
The American Institute of CPAs is calling on the Internal Revenue Service to issueguidancerelated to howdigitalassetlossesaffecttaxobligations.
"With the complexities and recent bankruptcies involved withdigitalassetexchanges, taxpayers and practitioners are facing many issues with thetaxtreatmentoflossesofdigitalassetsand needguidance,"Eileen Sherr,AICPADirector forTaxPolicy & Advocacy, said in a statement."Taxpayers and their advisors need clearguidanceto accurately calculate theirlossesand properly meet theirtaxobligations and we urge the IRS to adopt our recommendations and provide thisguidance."
In an April 14, 2023, letter to the agency,AICPAsaid it hopes the submission of the comments that the"IRS will provide additionalguidanceto clarify howdigitalassetlossesare handled in various scenarios. Suchguidancewill provide greater certainty to taxpayers and their preparers in confidently and properly complying with their overall reporting requirements fordigitalassets, and better ensure consistent application of thetaxlaw among taxpayers."
The organization offers a range of recommendations on a number of topics related to thetaxtreatmentofdigitalassetlosses, with a focus onlossesincurred by an individual investor rather than a trade or business.
One scenario highlighted by theAICPAis the determination of worthlessness of adigitalasset. The organization notes that Chief Counsel Advice (CAA) 20230211"states that ‘alossmay be sustained…if the cryptocurrency becomes worthless resulting in an identifiable event that occurs during thetaxyear for purposes of section 165(a),"’ adding that the advice notes that cryptocurrency can be valued at less than one cent but still greater than zero because it can still be traded and"that could potentially create future value."
AICPAwrote that if"the position of Treasury and the IRS s that a cryptocurrency is listed on an exchange and has liquidating value greater than absolute zero, we recommend that Treasury and IRS state this in bindingguidance(published in the Internal Revenue Bulletin)."
Another topic covered by the comments was the question of when, if ever, mightdigitalassetsbe securities fortaxpurposes.
"Authoritativeguidanceis needed on when, if ever, the section 156(g) worthless security capitallosstreatmentapplies to cryptocurrency and otherdigitalassets,"AICPAwrote."Bindingguidanceshould also be provided on basis determination fordigitalassets(currently the special options are only in non-binding FAQs), as this is a matter relevant to measuring gains andlosses."
AICPAalso stated thatguidance"is needed on thetreatmentof lending of virtual currency otherdigitalasses under sections 162 such as if the taxpayer is in a business of ‘lending’digitalassets), 165, 166, 469, 1001, and 1058, and possibly other provisions. Thisguidanceshould cover not onlylossesfrom ‘lending’ virtual currency and otherdigitalassets, but the categorization of the income generated (portfolio, business or other) and related expenses."
Other topics covered by the comment letter include:
What facts indicate abandonment of adigitalasset?
In the case of theft of adigitalasset, does the Ponzilossguidanceapply beyond Ponzi-lossesto other fraudulent arrangements, includingdigitalassetlossesfrom certaindigitalassetexchange activities?
When would section 1234A apply to termination of adigitalasset?
How should a taxpayer reportdigitalassetactivity if they are unable to access their records due to bankruptcy of an exchange?
Is adigitalassetconsidered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlyingdigitalasset?
This and othertaxpolicy and advocacy comment letters filed by theAICPAcan be foundhere.