Crypto hedge funds are operating without being provided a proper set of rules for taxation by the IRS. Once these rules are issued, it will be disadvantageous for many hedge funds, Bloomberg reports.
The problem stems from the fact that the IRS and the US CTFC have not agreed a proper definition for cryptocurrencies. The IRS believes that they bear similarities to properties while the CFTC believes that they are commodities. Furthermore, the IRS announced in July that crypto hedge funds would be observed closely, which could easily lead to penalties.
Tax attorney Clay Littlefield said, “There is still a lot of uncertainty about how the IRS will come down on virtual currency. There are some good arguments for why this analogy or that analogy should apply, but there’s not a lot there.”
While some of the hedge funds report their gains and losses, others hope that cryptocurrencies are categorized as commodities by the IRS. Some funds are also created offshore in order to find a way around the IRS’ rules.
Karl Walli, Treasury Department’s office of tax policy’s senior counselor, said that the IRS was aware of the issues faced by crypto companies. However, he added, “There’s no way in this environment that we’re going to be able to put out guidance on the majority of those issues.”
Earlier this year, Credit Karma Tax published a study which showed that less than 100 Americans had reported their crypto gains to the IRS. Tax manager Jagjit Chawla said, “Generally, Americans with more complex tax situations file later in the tax season, especially if they expect that they’ll owe money. However, given the popularity of Bitcoin and cryptocurrencies in 2017, we’d expect more people to be reporting.” The company also reported that 52 percent of tax filers were millennials while 14 percent were 55 year-olds in this season.
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