Kansas Audit Highlights Complex Enforcement of State’s Cryptocurrency Tax Law

TOPEKA — The Kansas Legislature Audit Agency announced on Wednesday that the state is losing tax revenue owed by cryptocurrency users, but federal and state regulators have struggled to get a handle on the complexity and the instability of an industry designed to operate in secrecy.

The audit, which focused solely on the issue of Kansas taxation, revealed the challenges faced by government entities trying to harness digital or virtual currencies and change a tax framework that required fewer people to underreport transaction income.

“Kansas tax policies are generally aligned with federal cryptocurrency policies, but we found some of these policies to be difficult to enforce,” said audit manager Matt Etzel.

He said 22 states — not Kansas — have introduced bills since 2015 designed to regulate cryptocurrencies. No consensus has emerged among states on regulatory best practices since only Wyoming and Nevada have implemented such laws, he said.

The Kansas Department of Revenue reported 20,000 Kansas tax returns on 1.5 million reported cryptocurrency transactions in 2021, but auditors suggested that figure underestimates actual usage by Kansas residents. ‘State. A Pew Research Center survey found that 16% of American adults or 40 million people nationwide use cryptocurrencies. The Internal Revenue Service estimated that there are 8,600 cryptocurrencies in the market.

“We need to keep looking at this,” said Sen. Robert Olson, a Republican from Olathe and chairman of the Joint House-Senate Audit Committee. “Kansas is probably losing a bit now, but it will be a lot more in the future.”

Michael Hale, an attorney with the Kansas Department of Revenue, said the IRS continues to grapple with the emerging and largely unregulated alternative to conventional paper money or a credit card. In 2023, he said, cryptocurrency exchanges would be required to report customer information and transactions to the IRS. This mandate will not cover transactions made by individuals in a multi-trillion dollar market.

The links between the federal tax code and the Kansas tax code were an advantage because the IRS has vast resources to improve the identification of tax evaders engaged in the cryptocurrency market and Kansas could build on this investigative work, he said.

“States have been very careful. Do not jump into water until they know the depth. That’s the approach Kansas has taken,” Hale said.

His warning: “This is some kind of caveat emptor – buyer beware.”

Republicans and Democrats on the Legislative Post-Audit Committee said they want to further explore the cryptocurrency universe in terms of reforming state tax policy and providing neutral information to consumers around the world. Kansas.

Senator Mike Thompson, a Shawnee Republican who dabbled in cryptocurrency, said the availability of Bitcoin, Ethereum and thousands of smaller industry players meant people had the opportunity to lose big money quickly. He said there were types of investments that could cause a person to “lose your shorts completely,” but he didn’t imagine the Legislature would quickly dive into the area of ​​cryptocurrency regulation.

“There’s a lot more research that needs to be done before we get into this,” Thompson said.

Individuals are ultimately responsible for making investment decisions, but some vulnerable Kansans could benefit from information that informed them of potential pitfalls, said Sen. Ethan Corson, D-Fairway.

Cryptocurrencies can be defined as a digital representation of value used to purchase goods, goods, or services. It can be held and traded as a speculative investment similar to stocks, bonds or foreign currencies. Cryptocurrency operators rely on complex encryption to secure transactions recorded on a network of blockchains, or digital ledgers, maintained by users.

Sharon D. Cole