Beneficial Ownership of Cryptocurrency: Who Pays the Tax Bill? Rob Wood Explains
Cryptocurrency is property, in the view of the IRS. And under the new tax law, crypto holdings like Bitcoin are not eligible for Section 1031 tax-free exchanges. That means that sales or exchanges of cryptocurrency will be taxable events. But who should pay the tax when cryptocurrency is held by one person for the benefit of another? As tax lawyer Rob Wood explains in this report, the answer can be a little tricky. He also discusses the problem in his article, “At Tax Time, Who Really Owns That Crypto Anyway? - Expert Take.”
Wood says that there is no problem in most situations: If you own the property, you pay the tax. The catch arises when the person who is holding the cryptocurrency is holding it for the benefit of someone else. The issue of beneficial ownership “is as old as the hills.” Wood also notes that the IRS generally determines ownership of property based on local law. This highlights the importance of fact situations when the question involves ownership.
The best way to avoid ownership questions, Wood says, is to have clear documentation of ownership. Telling the IRS, after you’ve sold Bitcoin, that the sale was on someone else’s behalf probably won’t make the tax problem go away. It’s somewhat analogous to the situation with joint bank accounts. In such a situation, both people are liable for paying taxes on interest earned. If one signatory on the account is merely there as a convenience for the other person, documentation is the key to clarifying who should pay taxes on the account.
Wood also points out that local law may not always be the determining factor when the IRS is looking to collect taxes. Because cryptocurrency is very new, there is almost no law on ownership and tax issues. However, there are cases where a beneficial owner has ended up on the hook for taxes. In Chu v. Commissioner, a man was had to pay income tax as the beneficial owner of a bank account, even though he was not the owner of the account under local law.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.