Ultimate Guide For Cryptocurrency Tax Resources (#GotBitcoin)
Tax specialists warn those who aren’t in compliance with rules to act quickly to avoid more woes. The Internal Revenue Service is on the war path against Americans who haven’t reported income from cryptocurrencies like bitcoin. The Ultimate Guide For Cryptocurrency Tax-Related Matters (#GotBitcoin)
In late July, the IRS said it had started to send warning letters to more than 10,000 people who may not have complied with tax rules on virtual currencies. Agency officials have said criminal tax indictments involving cryptocurrencies are expected soon, and other enforcement letters are going out.
“I tell them, ‘It’s time to put your running shoes on.’ You must get to the IRS before they find you, especially if you got a letter,” says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink in New York.
Dealing with the IRS disclosure maze is Mr. Skarlatos’s specialty: He guided nearly 2,000 U.S. taxpayers through it when they confessed secret offshore accounts between 2009 and 2018.
He performed triage for more, telling those with cases that wouldn’t land them in prison about simpler solutions.
The IRS’s crypto crackdown has similarities with its offshore-account campaign. Mr. Skarlatos has handled about a dozen high-dollar cryptocurrency cases.
Mr. Skarlatos says people in possible violation of IRS rules should first look for signs of tax fraud. It must involve intentional disobedience of the law. One clear sign is a large amount of unpaid tax, say above $15,000, he adds.
Other signs of fraud can be efforts to disguise cryptocurrency ownership, as by using an assumed name; using a “tumbler” service that mixes some cryptocurrency with others to obscure the original source; and lying to a prior tax preparer—because the IRS will ask.
If there was fraud, the crypto owner will need a lawyer to provide attorney-client privilege. The owner should probably apply to the IRS’s Voluntary Disclosure program, which often levies large civil penalties but protects against criminal prosecution.
If the wrongdoing wasn’t fraudulent, the crypto owner can often file what is called a qualified amended return, typically through an accountant. This will avoid some penalties but not interest.
There is an important exception for crypto owners who weren’t fraudulent but are already known to the IRS. This category includes people who were outed when a federal court required Coinbase, the leading cryptocurrency exchange, to turn over information on about 14,000 customers to the agency.
When the IRS contacts wrongdoers about an audit before they come forward, Mr. Skarlatos says, they often face larger penalties than wrongdoers who weren’t known to the IRS.
The IRS is focusing on cryptocurrencies because their use is expanding, and enthusiasts often praise the anonymity virtual currencies offer. Many trades aren’t reportable to the IRS by third parties—unlike sales of securities such as stock shares, which generally must be reported to the IRS by brokerage firms.
An IRS analysis found that for 2013, 2014, and 2015, when more than 80% of returns were electronically filed, fewer than 1,000 e-filed returns each year reported transactions appearing to use virtual currencies. Coinbase said at the end of 2013 that it had 650,000 accounts. Now it has more than 30 million.
Cryptocurrency advocates are upset by the IRS’s campaign. They say the agency hasn’t yet released long-promised guidance, including how to pinpoint some fair market values; which cost-allocation methods to use; or whether the agency favors a small exemption for personal use.
Recently, 60% of global bitcoin transactions were below $600, according to Coin Metrics, a cryptocurrency data provider.
Advocates also point out that tax reporting is onerous because the IRS classifies cryptocurrencies as property akin to stocks or a home. If someone uses bitcoin to buy a car or lunch, that is typically a taxable sale—as it would be if the person paid in shares of stock.
If the selling price of the bitcoin is higher than its purchase price, then the profit is typically taxable at capital-gains rates. If the selling price is lower, there may be a deductible capital loss. Frequent traders can have thousands of transactions to detail on IRS Form 8949, and cryptocurrencies’ volatility can yield both gains and losses within a short period.
The IRS will dismiss these arguments, says Jordan Bass, a certified public accountant in Los Angeles who says three-quarters of his tax-prep practice involves cryptocurrencies, a specialty he turned to after advising friends with bitcoin.
“The tax framework has been clear since 2014,” he says. “The IRS isn’t going to impose terrible penalties on good-faith efforts, but it will try to make an example of bad actors.”
IRS Sends New Round of Letters To Bitcoin And Crypto Holders
Last week, the United States Internal Revenue Service sent another round of letters to crypto traders called CP2000. These notices were sent to traders of some crypto exchanges due to inconsistencies found in their tax reports.
Using the information provided by third-party systems — such as crypto exchanges and payment systems — the IRS has been able to determine the amounts traders owe and included the amounts in dollars in the notices. Individuals who have received these notices are required to pay within 30 days, starting on the delivery date indicated in the letter.
If you think the exchange — on which you traded — provided your details to the bureau, you are probably right, but do not hold it against the exchanges. The regulation stipulates that all broker and barter exchange services are required by law to annually report trader activity on a 1099-B form, send it directly to the IRS and send a copy to the recipient.
In addition, transaction payment cards and third-party network transactions are also required to report on Form 1099-K, send it directly to the IRS and send a copy to the payee.
The IRS has not yet published specific guidelines for crypto exchanges. In fiat stocks, every broker must submit 1099-B to the IRS and send a copy to the trader. In crypto, the IRS still didn’t publish clarification whether exchanges should provide 1099-K or 1099-B.
Exchanges can benefit from the uncertain situation to provide 1099-K — like Coinbase Pro and Gemini — but some do not provide any forms, such as Kraken and Bittrex. Meanwhile, the exchange must provide the users with the 1099-K copy by the end of every January, so they will be available to use it in their capital gains report. The users, at the same time, don’t submit the IRS their copy of 1099-K, as they only use this form to calculate and report on their capital gains or loss report.
Similarly, earlier this month, the United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs, has reportedly requested that digital currency exchanges provide it with information about traders’ names and transactions, aiming to identify cases of tax evasion.
In the U.S., data gathered from these exchanges is collected by the IRS and compared to every trader’s 1099-K report. If the reports do not match the data provided by the exchanges, the IRS will send the CP2000 notice to traders. The notice includes the amount every trader is expected to pay within 30 calendar days.
What’s more, the notice generally includes interest accrued, which is calculated from the due date of the return to 30 days from the date on the notice. This Interest continues to mount until the amount is paid in full, or the IRS agrees to an alternate amount.
It means that interest began on the due date — on the day that you were supposed to report this for the first time. If you should, for example, have included this capital gains on your 2017 report, the interest will start on April 2018 — the last day you should have reported this gain. And it’s calculated until the reply date on the CP2000 notice.
Those Who Received The CP2000 Letter Have Two Options:
If The Amount Proposed Is Correct:
Complete the response form, sign it and mail it to the IRS along with the tax payment.
If the amount proposed is incorrect:
Complete the response form and return it to the IRS along with a signed statement outlining why you are in disagreement with the amount listed. It is important to include any supporting documentation to your claims.
It is highly recommended to provide a supporting calculation that is comprehensive and includes all wallet activities and transactions carried out on all exchanges in order to have a complete and accurate report as required by the IRS.
You do not need to file an amended return Form 1040X, but if you choose to do so, you should write “CP2000” on top of it.
It is important to understand that 1099-K reports for individuals trading crypto can be inaccurate in some cases, and does not include the cost basis, which is crucial for crypto trading calculations.
1099-K only asks for the gross amount of the activity. In crypto reports, you need to know how much it costs you (how much you paid when you bought it) and not only how much you got when you exchanged it.
You pay capital gains tax on the profit between the buy amount to the exchange (to fiat or another crypto) amount.
The price you pay for it is called “cost basis.” Without it you will not have an accurate report on crypto. 1099-K forms don’t ask this information, only 1099-b forms do.
Therefore, crypto activity must be fully calculated and compared to the previous tax filing before replying to the IRS notice.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Or Lokay Cohen is the vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation and managing a leading tax consultant firm. She holds an LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.
IRS Expands Penalties: Which Tax Mistakes Are Better Not To Commit
Willful and non-willful tax flubs are different. Taxes are complex, and innocent tax mistakes can often be forgiven — maybe with no penalty. Even if there is a penalty, non-willful is vastly lower than willful. In a criminal tax case, this fundamental dichotomy can mean the difference between innocence or guilt, freedom or incarceration. But penalties in civil cases can be plenty bad — and most tax cases are civil — and to the United States Internal Revenue Service, bad intent may not be bad at all.
With crypto, the IRS has said it is digging hard, investigating both tax evasion and just poor compliance. But any interaction with the IRS can routinely involve some kind of penalty. Sometimes, the IRS uses the threat of penalties to encourage payments. But in other cases, the IRS pursues penalties with a vengeance.
A good example is offshore accounts, which have strong parallels to crypto tax-compliance issues. Both willful and non-willful failures to report offshore accounts can be penalized. Civil penalties for non-willful violations can be $10,000 per account per year. But if the IRS says you were willful, you can pay up to $100,000 or 50% of the amount in the account. This is for civil cases, imposed in the context of regular IRS audits, even through the mail.
If the IRS says you were willful and wants big penalties, you can pay them or push back through the IRS Appeals Division. IRS Appeals is the classic place where the IRS and taxpayers settle disputes. But sometimes, either the IRS or the taxpayer won’t budge. Some courts say willfulness is a resolution to disobey the law, but one that can be inferred by conduct. Watch out for conduct meant to conceal.
However, much less can now be willful. The IRS penalizes for willful blindness and recklessness. The IRS often refers to Section 6672 of the tax code, which involves payroll taxes. Every employer must withhold taxes and promptly send the money to the IRS. If you don’t, Section 6672 permits the government to collect it from officers, directors and even just check-signers — any “responsible” person who willfully fails to pay employment taxes.
Willful mean in this context is very favorable to the government. Taxpayers are readily found to be willful if they merely ought to have known there was a risk withholding taxes were not being paid, and if they were in a position to find out. The IRS usually wins these payroll tax cases, so willful in this context means pretty little.
Aren’t foreign bank accounts different? The IRS appears not to think so. In the case Bedrosian v. U.S., Arthur Bedrosian opened two Swiss bank accounts in the 1970s but did not tell his accountant until the 1990s. The accountant advised him to do nothing. He said it would be cleared up at Bedrosian’s death, when the assets in the accounts were repatriated as part of his estate. But in 2007, a new accountant listed one account and not the other.
Eventually, Bedrosian amended his tax returns to correctly report both accounts. The IRS said the violation was willful and slapped on a penalty of $975,789 — 50% of the maximum value of the account. The District Court for the Eastern District of Pennsylvania found Bedrosian’s actions “were at most negligent,” and that the omission of the large account was “unintentional oversight or a negligent act.” So, the government appealed to the 3rd U.S. Circuit Court of Appeals.
The 3rd Circuit reversed the lower court’s decision due to the IRS’ arguments about the much harsher willful standards from Section 6672 payroll tax cases.
The 3rd Circuit cited two Section 6672 cases and quoted the standard for reckless disregard from one. The Bedrosian case was remanded to the District Court to apply the new standard. The fear is that willfulness is beginning to look quite broad — just as the IRS likes.
The IRS can almost always show willfulness any time payroll taxes were not paid. The flimsy “in a position to find out” standard in the context of Section 6672 noncompliance is very broad. In short, is the government seeking a sort of carte blanche when it comes to proving willful FBAR penalties (i.e., when one fails to report a foreign bank account)?
The Justice Department’s reply in the Bedrosian case claims that the taxpayer, by signing and filing his or her return without reviewing it, “ought to have known” that there was a “grave risk” the form might not be accurate.
This argument suggests an attempt to use the signing of a return as inherent reckless disregard of the duty to report foreign accounts. The Justice Department has successfully argued in other cases that merely signing a return without the proper box checked is per-se willfulness — see United States v. Horowitz, et al., 123 AFTR 2d 2019-500 (DC MD); Kimble v. United States, 122 AFTR 2d 2018-7109 (Ct. Fed. Cl.).
The courts in both cases said taxpayers have constructive knowledge of the content of their tax returns and cannot claim ignorance. In Horowitz, the taxpayers are arguing on appeal that the Section 6672 standard is inappropriate because FBAR willfulness occurs in a much different context.
It may be too soon to tell how all of this will shake out. Perhaps many taxpayers facing willful penalties may end up with understanding IRS agents who opt for non-willful penalties, at least if the taxpayer’s explanation and behavior seem reasonable. Taxpayers should be prepared to justify their mistake or misunderstanding in their particular circumstances if they hope to avoid the ever-expanding net of willfulness that seems to be brewing from the government.
There are growing concerns about whether IRS penalties are getting harsher and harsher. So far, the specific context for this drive seems to be in the offshore account arena. That is an easy one for the government.
These days, the IRS has mountains of information and documentation about offshore accounts nearly everywhere. That makes any infractions, however minor, perhaps even more risky than most other tax gaffes.
Still, if the IRS’ drive for penalties continues, one wonders if we might one day have strict liability for tax problems. In the meantime, when it comes to penalty notices and disputing penalty findings at any level, extra care is likely to be required.
The IRS Is Blindly Coming After Cryptocurrency Traders — Here’s Why
Over the past month, we have seen the IRS, the tax collecting agency of the United States, send out more than 10,000 warning and action letters to suspected cryptocurrency holders and traders who may have misreported digital assets on their tax returns. Letters like the 6174-A, 6173 and CP2000 have appeared in the mailboxes of cryptocurrency traders throughout the country, and the crypto tax software company that I run has seen an influx of frantic customers coming to us for tax help out of fear of penalties.
The problem here is that the IRS doesn’t have all of the necessary information. In fact, not only does it not have all the information, but the information that it does have on the cryptocurrency holders that it is sending letters to is extremely misleading.
This information, which was supplied to the IRS by cryptocurrency exchanges like Coinbase, is causing the agency to blindly and oftentimes inaccurately come after cryptocurrency traders.
Related: Internal Revenue Service Sends New Round of Letters to Crypto Holders
Allow me to break this down further.
How Is Cryptocurrency Taxed In The U.S.?
In many countries around the world — the U.S. included — cryptocurrencies like Bitcoin are treated as property from a tax perspective, rather than as a currency. Just like other forms of property — stocks, bonds, real-estate — you incur capital gains and capital losses that need to be reported on your tax return whenever you sell, trade or otherwise dispose of your cryptocurrency.
Pretty straightforward: If you make a bunch of money investing in Bitcoin (BTC), you have a capital gain and a tax liability that needs to be reported. If you lose a bunch of money, you have a capital loss, which will actually save you money on your tax bill — though it still needs to be reported.
It doesn’t come as a huge surprise that many enthusiasts have not been paying taxes on their cryptocurrency activity. Because of this, it actually makes a lot of sense why the IRS has started carrying out these enforcement campaigns. However, the agency is using information that is extremely misleading, and it is leading to problems. This misleading information starts with Form 1099-K.
Breaking Down Form 1099-K
Cryptocurrency exchanges like Coinbase, Gemini and others issue 1099-K’s to users who meet certain thresholds of transaction volume on their platforms. The IRS states on its website that the 1099-K is an information return used to report third-party network transactions to improve voluntary tax compliance.
In plain English, the 1099-K is used to report your gross transactions on a third-party network — in this case, a cryptocurrency exchange. This means that all of your transactions, buys, sells, transfers, etc. are summed up and reported on a 1099-K. If you meet certain thresholds — gross payments that exceed $20,000 and more than 200 such transactions — you and the IRS are both sent a copy of this 1099-K from the cryptocurrency exchange. The IRS is using these documents to monitor who is and isn’t paying taxes correctly.
These “gross transaction” reports can quickly get extremely large for high volume cryptocurrency traders. Remember, every transaction you made is being summed together on this form. I purchased $1,000 worth of Bitcoin, and then traded that Bitcoin in and out for Ether (ETH) five times, and my gross proceeds are now over $6,000 — even though I only ever “put in” $1,000 cash!
This is because all “buy” transactions are added together to report gross proceeds, and in this case, I technically had six different buy transactions and six different “sell” transactions — a Bitcoin trade into ETH is considered both a buy of ETH and a sell of BTC.
You can see how this number can become extremely large for a high volume trader. At CryptoTrader.Tax, we’ve seen 1099-K’s from customers in the millions of dollars range when the trader only ever had a few thousand dollars worth of crypto.
Why this is so problematic
1099-K’s are reporting gross transaction amounts and are being sent to the government. Yet, the numbers reported are completely irrelevant when it comes to tax reporting, as you are only actually taxed on your capital gains and losses.
Again as an example, say you purchased $10,000 worth of Bitcoin in April and then sold it two months later for $9,500. You have a $500 capital loss that would be deducted from your taxable income. However, reported on 1099-K, nothing is said of your net loss; the form only tells the government that you have $19,500 of gross cryptocurrency transactions.
Ultimately, 1099-K is not a form that should be used for tax reporting purposes, yet the IRS is relying on it for enforcement. Many people often mistake the 1099-K that they receive from cryptocurrency exchanges with the typical 1099-B that they might receive from their stock broker or other investment platform outside of crypto.
The 1099-B is the correct form that reports all necessary information required to calculate and accurately report capital gains and losses — including cost basis and fair market value of your investments. It’s very easy to determine your total capital gain and loss with this form, contrary to 1099-K.
The fact that the IRS is relying on 1099-K to issue action letters is problematic.
Unfortunately, cryptocurrency exchanges do not have the ability to give you an accurate Form 1099-B.Why cryptocurrency exchanges can’t provide tax reports like a stock brokerage does because cryptocurrency users are constantly transferring crypto into and out of their exchanges, the exchange itself has no way of knowing how, when, where or at what cost (cost basis) you originally acquired your cryptocurrencies. It only sees that they appear in your wallet on their platform.
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting.
In other words, cryptocurrency exchanges do not have the ability to provide you with the necessary information to calculate your capital gains and losses. This also means that they also don’t have the ability to provide you with a 1099-B.
Coinbase Itself Explains To Its Users In Its Faqs That Their Generated Tax Reports Won’t Be Accurate If Any Of The Following Scenarios Took Place:
You Bought Or Sold Digital Assets On Another Exchange.
You Sent Or Received Digital Assets From A Non-Coinbase Wallet.
You Sent Or Received Digital Assets From Another Exchange, Including Coinbase Pro.
You Stored Digital Assets On An External Storage Device.
You Participated In An Initial Coin Offering.
You Previously Used A Method Other Than ”First In, First Out“ To Determine Your Gains/Losses On Digital Asset Investments
These Scenarios Affect Millions Of Users.
Only Reporting Part Of Your Crypto Addresses? The IRS Needs To Know
Just a few months ago in July 2019, the United States Internal Revenue Service (IRS) sent approximately 10,000 letters to cryptocurrency holders regarding their crypto holdings.
The letters detailed that recipients may not have reported their transactions properly, or failed to report income and pay taxes on their digital currency transactions.
The IRS asked the recipients to check their reports and submit delinquent returns or file amended returns according to specific requirements. According to the letters, the reports must be “true, correct and complete” in order to be approved by the IRS. But how can the IRS know the submitted reports meet their criteria?
It is a well-known fact that the IRS used Chainalysis back in 2015 to possibly assist them in their Coinbase case, in which Coinbase was ordered by a United States federal magistrate to report 14,355 users to the IRS.
What many people don’t know, however, is that the IRS continuously contracts Chainalysis to support their intelligence work on cryptocurrency investors. The last contract was signed on July 2019, with a completion date of August 2020.
Additionally, the IRS has enlisted the help of Elliptic, another company involved in blockchain analysis that supports regulatory compliance under several contracts, the last of them signed on September 2018, with a completion date of September 2019.
Chainalysis Adds More ERC-20 Tokens to Crypto Sleuthing Service
Blockchain investigations firm Chainalysis has added support for five more ERC-20 tokens, expanding the reach of its anti-money laundering tracking service.
New coins include Basic Attention Token (BAT), OmiseGO (OMG), Dai (DAI), Maker (MKR) and 0x (ZRX). Together, they represented about 0.4% of the overall crypto market cap, and 0.002% of the market’s 24-hour volume at press time, data from CoinMarketCap showed.
The additions bring Chainalysis’ compliance, regulatory and tracking software – a favorite among federal investigators – to a larger swath of ERC-20 tokens. ERC-20 is crypto shorthand for “Ethereum Request for Comment” – a common set of rules governing tokens issued on the ethereum blockchain.
Chainalysis “is a de-facto federal standard,” said Casey Bohn, a crypto-crimes specialist with the federally funded National White Collar Crime Center. “That’s what they seem to be using most” to analyze and track crypto transactions.
Jonathan Levin, Chainalysis’ co-founder and chief strategy officer, said the additions help regulators trace illicit tokens – especially ERC-20 tokens on the ethereum network, which he said has become a popular hotbed for hackers to exploit.
In early 2019, hackers cleared out an estimated $16 million in ether and ERC-20 tokens from the now-defunct Cryptopia exchange.
ERC-20 tokens continue to gain popularity, putting pressure on exchanges to list them and increasing the chance bad actors try to steal them. This, Levin said, made the addition of ERC-20 tokens a priority.
“As of this month, there are more than 216,000 ERC-20 tokens found on the Ethereum network. With many end users flocking to get involved, cryptocurrency businesses want to quickly meet this demand.”
The eagle-eyed AML software is popular among crypto exchanges facing stringent global money-laundering safeguards. Last week, U.S. exchange Bittrex began using Chainalysis KYT software to monitor suspicious transactions, joining Binance.
Chainalysis will double its crypto coverage by the end of the year. It plans on adding XRP, ZCash and Doge, among others.
These Contracts Are A Signal That The IRS Has The Following Abilities:
Connecting one cryptocurrency address to another: The IRS can automatically find connected paths of crypto addresses and trace the flow of funding, source and destination of a specific transaction.
This technology enables the IRS to find the link between crypto addresses that have been reported to them with others that may not have been reported.
Identifying exchange activity: While crypto trading on exchanges is off-chain and cannot be found on the blockchain, every trader must use a crypto address on the blockchain in order to deposit or withdraw their cryptocurrencies.
The blockchain analysis systems have collected big data of exchanges addresses, which enable the IRS to link reported addresses to exchange activity.
Identifying estimated revenue and cash-outs and monitoring large volumes of activity.
Investigating criminal activity: Blockchain analysis companies provide support to the IRS in criminal and forensic cryptocurrency investigations.
Why Is It Difficult To Complete A Report As Per IRS Requirements?
Traders who have a lot of activity or trade on many exchanges and use many wallets sometimes have difficulties tracking all their past addresses.
Furthermore, crypto investors that use crypto as a means of payment make many transactions to third-parties, just like any other payment service. However, unlike credit cards, crypto payments do not specify who is the third-party, and those who did not keep records in real-time will struggle to reconstruct the data. With Bitcoin (BTC), this transaction will also contain a change address that needs to be associated with the payer to get an accurate and complete report.
What Can You Do To Make Sure Your Report Is Complete?
Collect all your data before you start your calculation. First of all, you need to understand that although tax filing is something that most people feel like they “just want to get it over and done with,” it is a process that should be done properly, so ensure you take the time to properly collect your data. Collect your addresses from all the wallets, all data from your crypto exchanges, and all of your activities during the required tax period.
Make sure nothing is missing. After you have successfully collected all your data, check for incomplete or incorrect information. There are some crypto tax platforms, such as Bittax or Blox, that track all your crypto addresses and combine them with exchange information.
In the event that information is missing, the system will alert the user and will continue to send alerts until the user has completed or corrected all required information in order to provide a complete report.
Disclose your missing information. Over time, it is possible that one of your crypto exchanges shut down, an address was rendered inaccessible due to hacking, or you misplaced your seed password and are unable to restore the information.
If you are unable to restore or gather the information required, disclose the reasons to the IRS with supporting documentation if you have any. It is important to consult with a professional before filling with the IRS. Make sure that your CPA or legal advisor understands crypto taxation.
The information that the IRS is receiving from cryptocurrency exchanges does not reflect your capital gains and losses whatsoever. This is problematic because these capital gains and losses are what you actually pay taxes on, not gross transaction amounts.
So, if you received a warning letter from the IRS, don’t panic. As long as you have been properly filing your cryptocurrency gains and losses on your taxes, you should be fine. The absurdly high numbers that you are seeing on these letters are often times irrelevant.
Nonetheless, it is a good idea to consult a tax professional who is familiar with cryptocurrency for further help and clarification — especially if it’s an action letter.
US IRS Releases Guidance On Crypto Airdrops And Hard Forks
The United States’ federal tax service has issued guidelines for tax reporting regarding cryptocurrency airdrops and hard forks.
In an announcement on Oct. 9, the U.S. Internal Revenue Service (IRS) announced the issuance of Revenue Ruling 2019-24, which addresses common questions of taxpayers and practitioners regarding crypto hard forks and airdrops.
The guidance also answers questions regarding cryptocurrency transmissions for investors that hold cryptocurrencies as a capital asset. IRS Commissioner Chuck Rettig said:
“The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”
Today’s new guidance adds to Notice 2014-21, which sets “general principles of tax law to determine that virtual currency is property for federal tax purposes.”
Or Lokay Cohen, the vice president of crypto tax calculation platform Bittax, told Cointelegraph that the guidance distinguishes hard forks from airdrops, and that not every hard fork should be treated as an airdrop.
Those who receive new currency in a hard fork need to report the assets to the IRS as gross income.
Cohen further stated that the recent guidance follows a Congressional request to the IRS that sought clarity on tax reporting for cryptocurrencies.
IRS Sends Letters To Cryptocurrency Investors
Earlier this year, the IRS sent thousands of letters to cryptocurrency investors to clarify crypto tax filing requirements. 10,000 crypto investors received post from the agency, asking some to amend their tax filings, while compelling others to pay back taxes and/or interest and penalties.
Capitalizing on the uncertainty surrounding crypto tax reporting, scammers subsequently attempted to con investors out of their digital assets by sending letters claiming to be from the IRS. Some letters claimed that an arrest warrant had been issued against the recipient due to their unpaid tax obligations and that failure to make a payment immediately could result in an arrest or other criminal action.
The IRS Will Now Ask If You Own Crypto in the Most Widely Used US Tax Form
The Internal Revenue Service (IRS) has updated the main form individual U.S. taxpayers use to report their income to include a question about cryptocurrencies.
Following the release earlier this week of the IRS’s long-awaited guidance for reporting crypto-related income, the IRS on Friday circulated a draft of the new Form 1040, Schedule 1, Additional Income and Adjustments to Income.
The draft was shared in an email to tax software companies, which the agency also shared with journalists.
The sheet, prefaced by a warning that it’s only a draft and not an actual document for filing taxes, asks at the top:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The main parts of the form, “Additional Income” and “Adjustments to Income,” both appear below this question.
“Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 should check the appropriate box to answer the virtual currency question.
Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose,” the IRS said.
The IRS asked its software partners to send comments on the new form in the next 30 days.
The guidance released this week was the agency’s second-ever given on virtual currencies, following five years of silence on the matter.
The document provided answers to long-standing questions, addressing such issues as crypto received as a result of a hard fork, buying goods and services with virtual currencies, calculating the fair value of crypto holdings and other matters.
Crypto IRS Audits: Hire Professionals Or Do It Yourself?
Do it yourself or outsource it? Rightly or wrongly, most people seem to fear the IRS, and an IRS audit can be daunting, even if it is entirely by correspondence. Most considerations are arguably the same in many different kinds of tax audits.
However, crypto tax matters can be even more sensitive than many others. One reason is return filings and records.
Let’s face it, many crypto investors have not been exactly scrupulous about filing taxes on time, reporting consistently, and keeping good records. After all, doing all of that isn’t easy, although it has gotten easier over the last year or two.
Another reason is the IRS focus on crypto. The IRS has said that virtual currency is an ongoing focus area for IRS criminal investigations, following its announcement on a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and audits.
For some time now, the IRS has been hunting crypto user identities with software too. The IRS keeps stressing noncompliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
A Wake-up Call
Remember the IRS summons for John Doe to get Coinbase user accounts? More of those could be coming. More recently, the IRS sent thousands of letters to people with virtual currency transactions stating that they may have failed to report income or pay taxes properly.
The IRS says it identified these targets through various IRS compliance efforts. IRS Commissioner Chuck Rettig seems to think this should be a wake-up call, and a warning.
The most frightening part of the IRS is the Criminal Investigation Division, although its involvement in an audit is rare. Even so, it is important to have a sound understanding of how criminal tax issues arise, so you can be prepared.
Many people are surprised to learn that the vast majority of IRS criminal tax cases arise because of so-called “referrals” from the civil division of the IRS.
It happens from plain civil audits and civil IRS collection activity. One IRS Agent spots or hears something fishy and passes it on. It can start innocuously. During the course of an audit or a tax collection matter, a civil IRS auditor discovers something that seems odd and refers it to the Criminal Investigation Division.
You may not even know that you are being investigated. Of course, many investigations do not lead to prosecutions. However, if you are contacted by the IRS Criminal Investigation Division, whether as a target or as a witness, you should politely decline to be interviewed. Refer them to your lawyer.
Many people think that cryptocurrency could be the next big thing for the IRS, which has been training its criminal agents for Bitcoin and other virtual currencies — and that should tell you something.
If the IRS is suspicious, they can require you to produce records, even ones that may incriminate you. With offshore bank accounts, the IRS refined this technique by seeking a grand jury subpoena to produce your offshore bank records.
Many Americans have a knee-jerk reaction to this. “Just take the Fifth,” lawyers tend to say.
The Fifth Amendment says you cannot be forced to incriminate yourself. However, the IRS can make you produce these required records even if they will incriminate you.
You may be able to refuse to speak under the Constitution, but sometimes, you cannot refuse to produce certain records.
Getting Professional Help vs. DIY
To return to more normal tax audits and notices, if the IRS audits you or has begun sending you notices and so on, should you handle it yourself or get professional help? The answer can vary, but getting help is often the wiser path. If the IRS visits you in person, hire a lawyer.
No personal visit should be taken lightly. You have no legal obligation to talk to the IRS, whether it is the civil or the criminal part of the IRS contacting you. Politely tell them that your lawyer will contact them, and ask for their business card.
It is unlikely that the IRS will push you to talk after you say this. But even if they do, politely decline. Even if the IRS says you are just a witness and that it is someone else they are pursuing, you do not have to talk.
Besides, who is a witness and who is a target of an investigation can be quite fluid — it can and does change. Written notices and other materials are obviously considerably less threatening. However, even if the query or audit is all in writing, most people feel a chill when dealing with the IRS.
You might receive a letter from the IRS asking about some aspect of your tax return. You might want to handle it yourself — but be cautious and reflective if you do, especially in more serious matters.
The point at which you may need a representative is often early. In fact, some taxpayers spend large sums with tax professionals precisely because they initially tried to handle the case themselves. Sometimes, you can dig a hole that runs deeper than if you had handed the case to a professional from the start.
One reason to have a tax lawyer or accountant handle your audit is to get some distance. Even in a civil audit, talking to the IRS can be dangerous and can put you in a disadvantageous position. The IRS may ask you about things you don’t want to answer, but not answering is awkward if you are handling it yourself.
Having a representative means you will have time outside the IRS presence to prepare appropriate responses that put the issues in the best possible light.
Some taxpayers even represent themselves beyond an audit at the IRS Appeals Division or in the United States Tax Court, although many of those cases seem to be poorly handled. Even the once-famous lawyer, F. Lee Bailey, represented himself in the U.S. Tax Court in a $4 million dispute with the IRS.
Bailey won one issue but lost most of them, including claimed loss deductions for his yacht. Worse, the court approved significant negligence penalties against him that he probably could have avoided with tax counsel. Seeing to your own case clearly isn’t easy, but it usually pays to hire someone to handle it.
New IRS Guidance: How To Report Crypto Assets Accurately
The United States Internal Revenue Service (IRS) is continuing to focus its efforts in cryptocurrency. After sending a recent enforcement letter, the IRS has released two new pieces of guidance for taxpayers who engage in transactions involving digital currency.
The new guidance includes Revenue Ruling 2019–24 and FAQs, including guidance for using the specific identification method. Additionally, the IRS has published a new draft for form 1040 Schedule 1, including a broad declaration regarding crypto holdings or trade.
Here Is A Breakdown Of These Publications.
Revenue Ruling 2019–24: Airdrops And Hard Forks
So, what are airdrops and hard forks, and what do they mean for the tax obligations of crypto holders?
In short, an airdrop occurs when a company distributes its tokens to a user’s wallet, free of charge, in order to raise funds, and in certain other cases, such as after hard forks.
A hard fork is when nodes of the newest version of a blockchain creates a permanent separation from the previous version, creating a “fork” in which one path follows the new and upgraded blockchain, while the other follows the old path.
In Bitcoin (BTC), a hard fork is the result of changes in the blockchain rules, sharing a transaction history with Bitcoin up to a certain time and date. The most famous hard fork occurred in August 2017, when some Bitcoin developers and users decided to initiate a hard fork known as Bitcoin Cash (BCH).
The new IRS guidelines distinguish between hard forks and airdrops, stating that not every hard fork should be treated as an airdrop. Those who received new currencies in a hard fork are considered as having received them through airdrop and should report it to the IRS as gross income.
The new ruling also acknowledges the possibility that a taxpayer did not receive an airdrop, detailing that if a taxpayer receives new currency from an airdrop into a wallet managed by an exchange that does not support the airdropped currency, the taxpayer is off the hook.
But, if the exchange later ends up supporting that airdropped crypto, the taxpayer is considered to have received the new currency at that time and is therefore liable to taxation.
While the IRS has made significant steps in regulating crypto, the new guidance raises questions about the request to tax airdrops when the crypto holder receives them as gross income, unlike regular crypto which it’s taxable events occur only on selling or exchanging.
Frequently Asked Questions
Back in 2014, the IRS issued Notice 2014–21, which describes how existing general tax principles apply to transactions using digital currency.
This notice contained 16 Q&As, which have now been amended and added to the 2019 ruling, resulting in a whopping 43 questions and answers that cover the entirety of crypto taxation issues.
These Are The Main Issues You Should Know:
1. Understand What Fair Market Value Is:
Fair Market Value (FMV) is typically defined as the selling price for an item to which a buyer and seller can agree.
Cryptocurrency value is determined by the cryptocurrency exchange and recorded in U.S. dollars. However, when it comes to peer-to-peer (P2P) transactions or other transactions not facilitated by an exchange, the FMV is determined according to the date and time at which the transaction was recorded on the blockchain.
2. Determine The Cost Basis:
Cost basis is the original value of an asset for tax purposes. For digital currencies, the cost basis is the amount you spent to acquire the digital currency, including fees, brokerage commissions from exchanges, and other acquisition costs in U.S. dollars.
Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits based on marital status, income, etc.
To calculate an accurate cost basis, you must first determine which units of currency were sold, exchanged, or disposed of and match the buying cost for every unit sold.
3. Choose The Calculation Method Carefully:
Here is the big news: For the first time, the IRS has clarified the preferable method of calculation for cryptocurrency, advising to use the “specific identification” method.
This means identifying the exact unspent output Bitcoin transaction (UTXO) you have sold out of all the Bitcoin you had in your wallets, and then calculating your tax liability based on the sale of the actual Bitcoin UTXO.
If you are not using it already, you should use the first in, first out (FIFO) method. This method does not take real-time user activity into consideration. Basically, to calculate in the FIFO method, you need to make a list of all purchases and another list of all sales.
Then, to do the matching, take the first item in the purchase list and calculate the tax results as if you sold it at the same price and on the same date as the first sale in the sales list. FIFO results can cause overtaxation, especially if you bought your first Bitcoins in the early years.
To get a complete and accurate report, taxpayers are encouraged to use the specific identification method.
This method is used to track individual units of virtual currency. It is applicable only when individual units can be clearly identified to provide a complete report of crypto-asset movements, including addresses, wallets, exchanges, etc.
Taxpayers can identify specific units by unique digital identifiers such as private and public keys and addresses, or with records showing the transaction information for all units of a specific digital currency (such as Bitcoin) held in a particular account, wallet or address.
Specific identification must exhibit the date and time each unit was acquired, the cost basis and FMV of each unit at the time of acquisition, as well as the date, time, FMV and sale value or price of each unit when it was sold, exchanged or disposed of.
4. Save All Your Documentation:
When compiling a report and filling out the appropriate documentation, taxpayers must report all income, gains and losses incurred by all taxable transactions, regardless of the amount.
IRS codes and requirements are to maintain thorough documentation on receipts, sales and exchanges in order to establish validity on their tax returns.
New IRS Tax Guidance Targets Crypto, and US Persons Who Use It
On Oct. 9, 2019, the United States Internal Revenue Service issued Revenue Ruling 2019-24 and a series of frequently asked questions, identifying rules governing U.S. taxation of digital currencies.
Taxation in the U.S. is unbelievably complex, but the new IRS guidance takes a step-by-step approach to address some of the most common issues facing holders of digital currency.
The basics are as follows: If you hold digital currency and you sell or exchange it, you are subject to U.S. tax. If you are granted digital currency in the form of salary or as a result of a hard fork, you have taxable income. If you receive digital currency as a result of a gift, there is no immediate tax.
U.S. taxation of digital currency is limited to U.S. persons. Who is a U.S. person? U.S. citizens, U.S. green card holders and individuals who spend more than 183 days in the country (measured using a formulaic three-year lookback). If that is you, a tax obligation may exist.
How do you measure your gain or loss from a sale or exchange of currency? It’s the difference between your digital currency cost basis and the fair market value of the property you received in exchange. How do you know what your cost basis is? The FAQs provide detailed guidance, but essentially, the IRS allows two methods for identifying your basis:
1) You Can Specifically Identify The Exact Currency Sold, Traced To The Ledger, And Use The Cost Of That Specific Currency To Determine Your Gain Or Loss.
2) Or You Can Use The “First In, First Out” Method, Meaning Your Basis Is Computed Based On The Cost Of The Oldest Currency Acquisition In Your Wallet, Moving Forward In Time As You Continue To Sell Currencies.
What about digital currency provided as compensation for services? That type of distribution is treated as ordinary income, not a capital gain, similar to cash paid in the form of salary and wages.
What about cryptocurrency forks? The Revenue Ruling holds that when a taxpayer does not receive units of a new cryptocurrency as a result of a hard fork, the taxpayer also does not have gross income. That is the good news.
However, when units of new cryptocurrency are distributed (either as a complete currency replacement or split with the new currency being issued but old currency still valid), the Revenue Ruling holds that the taxpayer has accession to wealth and therefore has ordinary income.
The amount included in gross income is equal to the fair market value of the new cryptocurrency measured as of the date that the distribution (usually via airdrop) is recorded on the distributed ledger.
While the IRS materials provide much-needed guidance, there are some concerns about unexpected hard forks.
Many times you find out about a hard fork after the fact. Nevertheless, the IRS takes the position that taxpayers must track and account for hard fork transactions. Thus, it places the burden on individuals to watch their wallet and trace activity throughout the year.
Also, there is no “de minimis” exclusion. Meaning, every transaction involving digital currency must be reported. What about a purchase of a cup of coffee with crypto cash? This payment gives rise to a taxable exchange. The value of the coffee you just bought less the basis in your currency you provided must be computed and reported to the IRS as a gain or loss.
When did you have to start complying with these basis rules and coffee purchases? Forever. In July 2019, the IRS announced through a news release that it had begun sending “educational” letters to taxpayers with digital currency transactions that have either potentially failed to report income or did not accurately report their transactions.
By the end of August, over 10,000 taxpayers had received these letters. There are three letter versions: Letter 6173, Letter 6174 and Letter 6174‑A.
Letter 6173 informs the taxpayer that the IRS has “information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency.” This letter requires the taxpayer to provide a direct response by taking one of three possible actions:
1) File delinquent returns, reporting any digital currency transactions.
2) Amend Returns To Properly Report Any Digital Currency Transactions.
3) Provide A Statement That Explains Why The Taxpayer Believes It Is In Full Compliance, Signed Under Penalties Of Perjury.
Letters 6174 and 6174-A inform the taxpayer that the IRS has “information that you have or had one or more accounts containing virtual currency.” Though neither of the two letters requires a direct response from the taxpayer, Letter 6174-A expressly warns the taxpayer that the IRS may pursue further enforcement activity in the future.
The three versions of the letters show that the IRS is mining the information it has in its possession and forming views about which digital currency holders it believes are noncompliant, and to what degree.
Although the IRS stated in its announcement that “all three versions of the letters strive to help
taxpayers understand their tax and filing obligations and how to correct past errors,” Letter 6173 seems to presume that the taxpayer in question already understands the digital currency reporting requirements and has chosen not to comply with them. Letter 6174-A is a step down from Letter 6173, but it still assumes a higher level of knowledge on the part of the taxpayer than Letter 6174 does.
John Doe Summons
The letters followed the IRS’s issuance of a “John Doe” summons to Coinbase, one of the largest platforms for exchanging Bitcoin and other forms of digital currency.
Through the John Doe summons, the IRS sought information regarding all Coinbase customers who conducted transactions on the Coinbase platform between 2013 and 2015. Coinbase resisted the summons and sought to narrow its scope.
In late 2017, the U.S. District Court for the Northern District of California ordered Coinbase to produce the taxpayer identification number, name, birthdate, address, records of account activity, and all periodic statements of account or invoices.
Ultimately, Coinbase produced documents for approximately 13,000 customers.
While it is widely speculated that the IRS identified the initial group of more than 10,000 taxpayers to receive compliance letters using the data provided by the Coinbase subpoena, any taxpayer with dealings in digital currency should anticipate increased IRS scrutiny.
Revised Draft Form 1040
Following the issuance of the October Revenue Ruling and FAQs, the IRS also released a draft Form 1040, Schedule 1 — which, if adopted, will require taxpayers to answer whether at any time during the year the taxpayer sold, sent, exchanged or otherwise acquired any financial interest in digital currency.
The change in Form 1040 would place taxpayers in the position of having to think about their digital currency holdings and inquire whether there have been taxable events that need to be reported and taxed.
Methods of coming into compliance
In light of increased enforcement and compliance efforts on the part of the IRS, it is especially important for taxpayers who have held digital currency in the years preceding 2019 to seek advice from a competent tax professional to determine if there have been any taxable transactions associated with the acquisition or disposition of digital currencies.
If there was a reportable transaction left off an income tax return, the IRS could impose significant penalties and interest charges.
The IRS is also reviewing income tax returns to determine if the noncompliance was due to willful conduct. Such review can result in criminal referrals and prosecutions for filing false tax returns.
There is good news in the face of the potential enforcement of noncompliance. Most taxpayers can take advantage of the IRS’s voluntary disclosure policy, which mitigates penalties. And for those taxpayers who received letters directly from the IRS, options for taking affirmative action are outlined in the letter.
The bottom line is this: If you have held digital currency at any time, you should contact a qualified tax professional to assist you in evaluating your tax situation.
IRS: Like-Kind Tax Exemption Has Never Applied To Crypto Transactions
The like-kind exchange tax exemption is not applicable to cryptocurrency transactions, according to the United States Internal Revenue Service (IRS).
An official at the IRS Office said that U.S. taxpayers have never been authorized to postpone paying tax as part of the like-kind exchange principle even before the 2017 tax overhaul, Bloomberg Tax reports Nov. 13.
Suzanne Sinno, an attorney in the IRS Office of the Associate Chief Counsel, delivered her remarks on U.S. crypto taxation at the American Institute of CPAs conference this Wednesday in Washington. According to the report, Sinno worked on recent IRS cryptocurrency guidance that was issued in October.
Like-Kind Exchange Exemption Can Defer Tax Payments On The Gain Of A Sale
Under U.S. tax law, a like-kind exchange, also known as a 1031 exchange, is an asset transaction that does not generate a tax liability from the sale of an asset when it was sold to acquire a replacement asset.
While it was clear that taxpayers could not claim crypto-to-crypto sales as like-kind after 2018, the rules governing transactions previous to the 2017 overhaul were unclear.
Based on the new announcement by Sinno, U.S. taxpayers have never been authorized to apply the like-kind exchange principle to crypto-to-crypto trades in order to postpone paying tax on the gain of a sale.
Promotional airdrops are still tax-free, for now
The news comes after the IRS issued guidelines for tax reporting regarding cryptocurrency airdrops and hard forks on Oct. 9. The new rules say that those who receive new currency in a hard fork need to report the assets to the IRS as gross income.
While the IRS distinguishes hard forks from airdrops, the agency has reportedly not yet decided whether promotional airdrops should be treated as taxable.
IRS Vs. Bitcoin ATMs: Industry Says There Is Already Enough Regulation
Earlier this week, the number of Bitcoin (BTC) ATMs installed worldwide reached a new milestone, surpassing 6,000. Coincidentally, another major development just a day before occurred within the same area: The United States Internal Revenue Service said it was looking into potential tax issues caused by such ATMs and kiosks.
This development might allow the IRS to succeed in mitigating the use cryptocurrency for large-scale federal tax non-compliance, experts suggest. However, Bitcoin ATMs remain a low-transaction-size business which is already regulated enough to detect high-scale fraud.
Bitcoin ATMS, From A Single Kiosk To A Multimillion Dollar Industry In Six Years
The world’s first-ever Bitcoin ATM opened in October 2013 at Waves Coffee House in Vancouver’s downtown area, while the first machine in the United States went online in February 2014 in Albuquerque, New Mexico (although, it was removed 30 days later).
Since then, Bitcoin ATMs have grown into a multi-million-dollar industry, as the companies who operate the machines collect sizeable fees (reportedly around 8.93%).
For instance, Cottonwood, a firm that controlled 91 machines in New York as of December 2018, had a gross annual revenue ostensibly exceeding $35 million — about $385,000 in cash per machine — and just 13 employees, as per a Bloomberg investigation.
According to data from online resource CoinATMRadar, the U.S. currently has the most Bitcoin ATMs in the world. More specifically, there are 3924 machines installed across the country, accounting for over 65% of the world’s total Bitcoin ATMs.
Moreover, the industry continues to develop at a rapid pace: Over 130 machines have been deployed this month alone, while the average daily number of Bitcoin ATMs installed is fluctuating at around seven.
Regulation: “Totally Legal” But Still A Gray Area
As it tends to happen within most booming industries, sooner or later, regulators start to apply more scrutiny. On Nov. 15, the IRS Criminal Investigation Chief, John Fort, said that his agency is collaborating with law enforcement to investigate illicit uses of cryptocurrency through kiosks, stating:
“If you can walk in, put cash in and get bitcoin out, obviously we’re interested potentially in the person using the kiosk and what the source of the funds is, but also in the operators of the kiosks.”
Fort explained that such services are required to conform to Know Your Customer and Anti-Money Laundering rules: “They’re required to abide by the same know-your-customer, anti-money laundering regulations, and we believe some have varying levels of adherence to those regulations.”
The IRS executive added that although the regulators haven’t had any public cases filed, they “do have open cases in inventory” related to cryptocurrency tax issues.
So how exactly is the industry regulated in the U.S.? It seems to fall into a grey area of the law. Cal Evans, founder of compliance and strategy firm Gresham International, told Cointelegraph:
“Most Bitcoin ATM owners that are trying to follow the rules, as much as possible, are relying on Money Transmitter laws. We see this strategy deployed with the bigger firms such as Coinbase. These laws differ from state to state with the USA, with the most notable exception being the state of New York where parties are required to own one of the notorious ‘Bitcoin’ Licenses to conduct this business.”
Thus, there are two levels of regulation: federal and state. As CEO of CoinATMRadar Matthew Hayes told Cointelegraph, the former is “similar in all the states and quite straightforward,” and aims to prevent illicit activities such as money laundering and tax evasion. State-level regulation, however, differs:
“Some states have relaxed rules and allow quite easy access to start such a business. In other states, there might be high requirements to operate incl. large size surety bonds and costly licenses.”
Thus, unlike traditional ATM operators, Bitcoin ATM operators are typically treated as Money Services Businesses that have to operate under Money Transmitter Licenses, the requirements for which vary by state, as Zachary Kelman, managing partner at Kelman.law, summed up in a conversation with Cointelegraph.
However, there are some exceptions among more crypto-friendly states that differ from New York and Florida regulations:
“On the other end of the spectrum are states that are far more Bitcoin ATM-friendly — for example, the Pennsylvania Department of Banking and Securities has determined that cryptocurrency transactions are exempt from money transmitter rules, and the Wyoming legislature enacted a law exempting cryptocurrency businesses from MSB licensing requirements.”
Andrew Barnard, co-founder of Bitcoin ATM firm Bitstop, added that many states, including California, have still not made up their minds in regard to Bitcoin ATMs or do not require a Money Transmitter License as long as the crypto sold through the ATMs is a two-party transaction. He elaborated to Cointelegraph:
“States like Texas and others do not require a money transmitter license if you are selling your own Bitcoin to the person in front of the machine as opposed to just sending the Bitcoin directly from an exchange to the customer which would make it a three party transaction.”
Some other hindrances come with the lack of more clear-cut regulations, albeit less major. For instance, companies have difficulties with obtaining local city permits for Bitcoin ATMs, which is why they are usually installed in private establishments, Evans observed.
Indeed, as the Bloomberg investigation argued, most crypto kiosks in the U.S. tend to be located in corner shops, cigar bars and casinos.
Nevertheless, there are some noticeable exceptions: Earlier this month, Bitstop installed one of its machines at the Miami International Airport, one of the largest airline hubs in the country.
As for the regulations, it seems that industry players do have concrete guidance to follow despite the juridical uncertainty that experts highlight.
“FinCEN has been clear since 2013 about the KYC/BSA/AML requirements for cryptocurrency exchangers,” said Max Lopez, marketing director at Coin Cloud — a company that operates as a licensed Money Service Business and hosts over 350 cryptocurrency kiosks across the U.S.
“We only know the regulations we are following and can not speak for others in the cryptocurrency kiosk industry,” Lopez added, drawing a line between large businesses and smaller players. “It’s important to separate individual companies and not place them all under one umbrella as you have regional, hobbyist and ‘mom and pop’ operators with one machine.”
Barnard of Bitstop confirms that larger companies follow the same rules within the Bitcoin ATM industry. “The top legitimate operators in the space are registered with FinCEN on a federal level and maintain a AML/BSA compliance program which should be tested and updated regularly (once a year),” he told Cointelegraph, adding:
“It’s Not That Difficult To Be Registered On A Federal Level.”
What Does The IRS Development Mean For The Industry?
The IRS should have a “probable cause” or “reasonable belief” to delve into the Bitcoin ATM industry, according to Evans. As of now, “simply using the Bitcoin ATMs itself is in no way a crime,” the expert stressed, especially if the vendor is following MTLs and users are declaring their transactions to the IRS:
“Let’s paint a scenario, if you are a Bitcoin ATM user in the US (which is totally legal), and you declare those transactions on your tax return (as now required), the IRS could be in breach of constitutional rights by investigating the individual. Essentially, the IRS should not be able to tax activity it then deems as ‘illegal’ activity after the fact. Otherwise, where do we draw the line? Do we begin taxing drug dealers?”
Nevertheless, the IRS has been historically slow to act, which also suggests that the industry is far from being radically changed by the tax regulator, Evans adds. Kelman, however, envisions certain changes that might come with the IRS statement. He told Cointelegraph that some of their Bitcoin ATM operator clients had already engaged with the IRS:
“The IRS has been amenable to these clients and their businesses, asking for and accepting without issue the Bitcoin ATM users’ Know Your Customer (KYC) information, which is collected to the extent possible by Bitcoin ATM operators per compliance with MSB rules.”
Kelman explained that while his firm does not expect Bitcoin kiosk owners to close down in light of this development, they do expect changes to which the kiosk operators must respond, such as collecting KYC data from any user whose transactions require Currency Transaction Reports or Suspicious Activity Reports filings:
“The Financial Crimes Enforcement Network (FinCEN) already requires MSBs to file Currency Transaction Reports (CTRs) on all transactions in excess of $10,000 and Suspicious Activity Reports (SARs) for any and all suspicious transactions — or sequences of transactions — over $2,000.”
Kelman believes that the statement from the IRS will prompt users to conduct smaller transactions beneath the KYC limit. In his opinion, the IRS “will be able to greatly mitigate efforts to use cryptocurrency for large-scale federal tax non-compliance,” while small-scale tax cheats will likely stay under the radar.
Indeed, larger operators seem unfazed by the news. Both Coin Cloud and Bitstop representatives told Cointelegraph that while smaller Bitcoin ATM owners might not be forced to either become fully compliant or shut down, it remains business as usual for them.
Even if smaller players choose to play by the rules, they might still have to shut shop over time due to the costs associated with maintaining a thorough compliance program, Bitstop’s Barnard added. He also told Cointelegraph:
“Mr Fort is reasonable when he says there is most likely a high variance of compliance and adherence to regulations from operator to operator. This is true because there are different Bitcoin ATM hardware models that have different software stacks and perform compliance differently. Not all operators are created equal. There’s a lot of good guys, but our industry does have its own share of bad apples.”
As Evans of Gresham International told Cointelegraph, physical ATM machines harness a large amount of data about their users, such as card used, PIN number attempts, speed of PIN entry, date, time, transaction sizes, and pictures of their face. “The main concern the IRS has with the Bitcoin ATMs, is that some of these machines do not collect ANY data,” he said:
“If we compare this, for example, to online exchanges (those which allow US citizens and residents to use them), they are required to keep accurate data on the users, which the IRS and other law enforcement bodies can then use to track the movement of funds.”
Enough Is Being Done Already
Nevertheless, Bitcoin ATMs controlled by large operators claim that they collect a considerable amount of data about their clients as per current regulations concerning Anti-Money Laundering and the Bank Secrecy Act.
“As a registered MSB with FinCEN, Coin Cloud is required to keep customer KYC and transactional data for at least 5 years,” Lopez told Cointelegraph. “All cryptocurrency kiosk companies can be subpoenaed at any time for the records they keep.”
Barnard said that although KYC collection can vary depending on how much the customer wants to buy or sell.
“For lower amounts under $150, a phone number, name and address may be reasonable,” the Bitstop representative told Cointelegraph, adding that they limit all of their customers to purchase no more than $3,000 per person per day.
“Even then, less than 5% of our customer base will use that limit,” he continued. “The average purchase from our Bitstop Bitcoin ATMs is $180 per person. Bitcoin ATMs are a high-volume, low transaction amount business.”
IRS Not Infringing Privacy Requesting Crypto Exchange Data: US Judge
A California federal court has affirmed the validity of the United States Internal Revenue Service’s (IRS) request for data from crypto exchange Bitstamp in connection with an individual tax reporting case.
Per a Nov. 25 filing, the court has found that five of the six arguments presented against the IRS “lack merit,” but has conceded on one point that the tax agency’s summons was indeed overbroad, as the Petitioner contended.
The filing relates to court proceedings initiated by William Zietzke, who has argued that the IRS is overstepping its remit in conducting an audit of his tax returns.
Petitioner Alleges Privacy Infringement, ‘Bad Faith’ And Irrelevance
As the filing outlines, Zietke had initially informed the IRS of his own mistake in a tax return that had allegedly overestimated his long-term capital gains in 2016.
In seeking a refund from the IRS to correct his error, the agency set out to investigate Zietke’s case, requiring him to provide extensive data on his history of Bitcoin holdings and transactions.
Zietke is alleged to have failed to inform the IRS of his use of crypto exchange Bitstamp, prompting the agency to summon data from the exchange about his holdings, as well as public keys and blockchain addresses associated with his transactions.
As the court outlines, Zietzke has questioned the IRS’ actions on six grounds; firstly, that it issued the summons to Bitstamp “in bad faith”; secondly, that it seeks data that is irrelevant to its audit of the Petitioner’s reporting; thirdly, that it already possesses the information that it seeks from Bitstamp.
Zietzke’s three subsequent arguments claim that the IRS allegedly made administrative missteps and — more crucially — has violated his reasonable expectation of privacy in Bitstamp’s records.
He has also argued that the U.S. government cannot guarantee the security of any records it receives from the crypto exchange.
Court Concedes One Of Six Arguments Against The IRS
The California court has conceded only one of Zietke’s arguments, noting that he is “correct that the summons is overbroad because it seeks both relevant and irrelevant material.”
The Court States That The IRS’ Summons Would Require Bitstamp To Produce Data That Is Without Due Temporal Limitation:
“Relating to Petitioner’s Bitcoin sales prior to 2016—even though such sales could not impact the gain or loss Petitioner realized if he sold Bitcoins in 2016. In this way, the summons requests information that is irrelevant to the IRS’s stated purpose of auditing Petitioner’s 2016 amended return.”
The court has however refuted all other arguments, finding that the validity of the IRS’ summons fulfills legal precedents and supports the agency’s role in enforcing the tax consequences of crypto transactions.
As reported, Zietke has made a similar attempt previously to quash an IRS summons issued to Coinbase, which was strongly contested by the IRS.
US Lawmakers Ask IRS to Clarify Crypto Tax Rules Around Airdrops, Forks in New Letter
The U.S. taxman’s most recent crypto guidance is sowing confusion, according to a letter from eight congressmen published Friday.
According to a letter penned by Representatives Tom Emmer (R-Minn.), Bill Foster (D-Ill.), David Schweikert (r-Ariz.), Darren Soto (D-Fla.), Lance Gooden (R-Texas), French Hill (R-Ark.), Matt Gaetz (R-Fla.) and Warren Davidson (R-Ohio), the Internal Revenue Service’s (IRS) latest guidance clarifies some aspects of the tax treatment for cryptocurrencies, but leaves much to be desired.
Friday’s letter was first shared by industry think tank Coin Center.
The IRS published guidance around taxing cryptocurrency holdings in October, addressing cost basis and forks, two long-standing questions the crypto community has had.
However, the new guidance raised a number of new questions, particularly around airdrops and unwanted forks. There was also no de minimis exemption for small purchases, such as a cup of coffee.
Friday’s letter pointed to these unwanted forks and airdrops as one major area of concern, noting that the current guidance appears to suggest that individuals are liable for taxes on any cryptocurrencies they gain as a result of a hard fork or airdrop, regardless of whether or not they’re aware they received these cryptocurrencies.
“This creates potentially unwarranted tax liability and administrative burdens for users of these important new technologies and would create inequitable results,” the letter said. “We do not expect this is the intended effect of the guidance, and we urge the IRS to clarify the matter.”
The Letter Specifically Asks:
“Does the IRS intend to clarify its airdrop and fork hypotheticals to better match the actual nature of these events within the cryptocurrency ecosystem? When does the IRS anticipate issuing that clarification?”
“Does the IRS intend to clarify its standard for finding dominion and control over forked assets wherein some level of knowledge and actual affirmative steps taken are necessary to find that the taxpayer has dominion and control?”
“Does the IRS intend to apply the current guidance or any future guidance retroactively, or will the IRS issue proposed guidance that is subject to notice and comment?”
The letter also said the congressmen are “concerned that the form of the guidance appears to indicate that this is ‘established’ law.”
The congressmen wrote that they hope the IRS continues to treat crypto as a “new and developing” area, and hope that the questions listed are answered “as soon as possible.”
The IRS has been ramping up its efforts in taxing crypto transactions, writing letters to exchange users warning they may need to restate their earnings and adding a question about cryptocurrency in its Form 1040.
Friday’s letter is only the latest in a series sent by lawmakers to the IRS asking the agency to clarify how it is approaching the space.
Tax Agencies Step Up Efforts To Hone In On Crypto Tax Evasion
The year 2019, for a short while, raised expectations that stablecoins would bring about mass adoption of cryptocurrencies. 2020, however, seems to be dousing those hopes with ever-tightening regulation that is putting pressure on investors and companies alike.
The first complication came only 10 days into the year. In early January, the European Union’s landmark Fifth Anti-Money Laundering Directive, or 5AMLD, was signed into law.
The law is the latest evolution of the EU’s response to the Panama Papers scandal, in which a leak of over 11 million documents uncovered the opaque financial networks used by the world’s richest and most prominent individuals to divert wealth overseas.
The era-defining financial scandal shone a light on a controversial characteristic of international finance that would soon spell trouble for cryptocurrency investors and businesses the world over: anonymity.
Lawmakers are constantly striving to tighten the legal loopholes that allow the world’s richest companies and individuals to avoid paying their dues. Try as they might, there are still states, often small island nations in the Caribbean, that willingly provide less legally restrictive environments.
Choosing to divert financial flows offshore is often not illegal at all, but the emphasis that companies such as the now-disgraced Mossack Fonseca place on privacy means that it is difficult for law authorities to bring individuals using such networks for criminal activities, such as money laundering, tax evasion or terrorist financing, to justice.
From the 5AMLD to central bank digital currencies, governments and regulators are acting on their belief that the identities of individuals behind anonymous transactions should be made available to authorities upon request.
Additionally, even though the United Kingdom is set to leave the EU in roughly one week’s time, its anti-money laundering regulations closely match the 5AMLD, and recent events indicate that measures are being increased even further to prevent cryptocurrency from being used to flout the law.
The Taxman Cometh
One of the criticisms of post-Brexit Britain is that it will relax financial regulation in order to form lucrative trade deals in the wake of its departure from the EU single market.
Although the U.K. has seen numerous financial scandals, its tax agency is looking to minimize the blind spots in the defenses against crime involving cryptocurrency.
Her Majesty’s Revenue & Customs announced that it had posted a $130,000 open contract call to develop a tool to help the tax agency gather intelligence through cluster analysis.
The announcement is the latest step on behalf of European lawmakers to break through the anonymous qualities of cryptocurrencies, taking aim at both the biggest coins and privacy tokens, such as Monero (XMR), Zcash (ZEC) and Dash (DASH).
As previously reported by Cointelegraph, although most users of such coins use them for entirely honest purposes, both law authorities and regulators are concerned by the potential for privacy coins to be used for nefarious activities, such as the sale of illicit drugs on the darknet, as well as terrorist financing and money laundering.
The regulatory changes and mounting compliance demands did not surprise Dash Core Group Chief Marketing Officer Fernando Guitierrez. In an email conversation with Cointelegraph, Gutierrez put forward his view that the changes will not only be a hindrance to companies but also to the average consumer.
He believes that: “This was all bound to happen.” He added that there was little chance that a growing industry would escape unnoticed:
“All these changes will make anonymity more difficult for the average consumer, as more exchanges comply and implement KYC. Those exchanges who don’t will be forced to jump from jurisdiction to jurisdiction, which will impose extra costs that only those committed to anonymity will be willing to pay. For criminals, this will change nothing because they are in that group, among many others who are not criminals, who are willing to pay more.”
The offering of the open contract from the HMRC is a signal that it is committed to effectively ramping up its blockchain forensics capabilities. Rich Sanders, principal and lead investigator at the Cipherblade Ltd blockchain analytics firm, told Cointelegraph that such a small contract is unlikely to shake up the system to any great extent:
“As for this particular initiative, a £100,000 software contract for a year says something but not very much in the grand scheme of things.”
How Effective Are Blockchain Forensics Tools?
While data about transactions using cryptocurrency is stored on the blockchain, it is not possible to identify individuals from this information alone.
Prior to the recent changes in legislation, blockchain analytics companies cooperated with intelligence agencies to link suspicious account activity to the individuals behind them.
Although the powers given to law authorities and compliance organizations under the 5AMLD are likely to radically change the way in which such procedures are carried out, Sanders believes that analytics tools are not a one-time fix for all anonymous crypto activity since:
“Blockchain analytics tools do not inherently and directly crack the anonymity,” or, more accurately, the pseudonymity, which is an attribute of blockchains. Therefore, forensic tools are only one element of a comprehensive investigative toolkit. He went on to add:
“The way, in which a blockchain analytics tool can help in linking the pseudonymous blockchain identity to an individual is by tracing cryptocurrency from/to initial/terminal destinations such as exchanges and other services, from which data can then be requested — which will often require a subpoena to be served or, at a minimum, another legally constrained form of data request.”
Sanders explained that, when examining the powers of blockchain analytics tools in bringing tax evaders to justice, it is important to note that there must first be pre-existing suspicion of wrongdoing:
“Blockchain analytics tools are likely to be brought to bear only in cases of existing and substantiated suspicion and are not themselves suited to finding potential tax evaders in the sea of cryptocurrency users. If that’s what you want to do, you’ll have a better time — as I once semi-seriously advised IRS employees — browsing through Reddit and looking at the chest-beating about tax evasion there (by accounts with poor OPSEC).”
Many in the sector welcome the regulatory changes. This chummy approach to cooperation with state organizations is not, however, shared by all. Dash Core Group’s Gutierrez told Cointelegraph that, in spite of their duty to protect, not all governments and intelligence agencies honor this:
“This has happened even in democratic countries, so we can’t assume that everything they do is fair or well-intentioned. Only where there is a real separation of powers, and the judicial one has consented, on a case by case basis, they should have such a right, if technically possible. If that can’t be guaranteed — and it can’t — it is better if they stay away.”
How Will Regulation Affect Crypto?
Cryptocurrency is still a young industry and faces many challenges on the road to becoming a mature sector that can compete with wider mainstream finance, should that ever happen.
The steady increase in regulatory and compliance demands are only to be expected as the nascent crypto industry inches closer to being used by a greater customer base.
Regardless of the titans of the tech industry toying with the idea of starting cryptocurrencies of their own, even some of the larger financial companies simply cannot take on the high level of risk associated with crypto at its current stage.
Some industry leaders recognize this turn as a welcome sign that digital currencies are being taken more seriously by regulators and lawmakers around the world.
For others of a more anarchistic philosophical standing, the loss of anonymity is a loss of one of the core precepts behind the entire reason for cryptocurrency’s being.
Gutierrez says that, while regulation is bound to happen to any growing financial industry, the costs associated with being regulated to an extreme level could well choke out smaller players and lead to an eventual stagnation:
“The constant introduction of new regulations is already changing the industry. Compliance costs have grown so much that only big players can afford them. This is only going to get worse. We will have fewer new projects and that will hinder innovation. I foresee a future, in which the blockchain industry resembles more and more the financial industry it proclaimed it would replace: well-funded players, slow change and lawyers everywhere.”
While Gutierrez foresees a slowdown in the near future, Andrew Adcock, CEO of the London-based crowdfunding platform Crowd for Angels, told Cointelegraph that the firm has not picked up on any discernible change in investor behavior in the wake of the regulatory changes:
“We haven’t seen a large change in investor and consumer attitudes, however, there has been a notable increase from companies seeking to implement changes and abide by the new regulation. I believe this is positive and will provide great protection for investors.”
Although any kind of attempt to hinder the supposedly essential core characteristics of cryptocurrency will create intense debate among investors, industry leaders and regulatory bodies, not all people are so fussed about the changes.
Adcock said that many of the clients at Crowd for Angels are not overly interested in the topic. Despite the doomsayers of the crypto industry, Adcock maintained his view that regulation is something to be encouraged and does not believe that this will alienate investors:
“There will always be those who seek anonymity, and this might be challenged by regulation, but harmony between both positions can co-exist.”
Are You Ready For The New Crypto Tax Season?
It’s here! The United States tax season officially started on Jan. 27, and this time, crypto tax is in the spotlight.
Following developments that culminated in theInternal Revenue Service publishing new guidance in October 2019, the bureau has begun to invest efforts in cryptocurrency tax reporting and investigation and is expecting to see an increase in crypto tax reports.
Those who intend to report their crypto activity can skip down to the tips for easy and accurate reports. As for the crypto cypherpunks who are not going to report — these next few lines are for you. Take a moment to realize that times have changed.
The most crucial advice this tax season is to realize that the anti-tax anarchist concept of “tax me if you can” is not going to work anymore. This is not 2011, when nobody knew where this was all going, and there were so few people involved with Bitcoin that the government didn’t care to deal with you.
The cryptocurrency ecosystem is growing — as it should be — and to get into the mainstream, it needs to go through regulation, and that includes paying taxes.
Sure, you can choose to hide and work with all the privacy solutions available to crypto, but understand that if you decide to stay unreported, the option for crypto trading in regulated exchanges along with more crypto services will not be available to you.
The IRS is definitely focusing on cryptocurrency this tax season, as it announced an International Compliance Campaign for cryptocurrency:
“The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams, including outreach and examinations. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practicable.”
Furthermore, the IRS Criminal Investigation, or IRS-CI, division is also focusing on cryptocurrency transactions. In their lastcriminal investigation report, Jim Lee, deputy chief at the division, wrote:
“IRS-CI almost always has jurisdiction. There is no better example of this than in tracing cryptocurrency transactions. Cryptocurrencies are undermining the financial and tax system. Companies pay employees in cryptocurrency or receive crypto for goods/services. They do not pay taxes and entities shift income to offshore exchanges with no reporting requirements, utilizing exchanges with little to no AML practices. Understanding the advancements in this area and staying.”
And if this is not enough, in the last Internal Revenue Service Progress Update Fiscal Year 2019, the IRS set up goals for 2020:
“The last in 2019, the IRS sent educational letters to more than 10,000 taxpayers who may have failed to properly report virtual currency transactions. The letters explained the tax obligations associated with virtual currency and describe how taxpayers can correct past filing and reporting errors. Virtual currency will remain an important focal point for the IRS in 2020. Our enforcement efforts are continually evolving to support the extensive efforts of compliant taxpayers.”
If you are considering reporting, here is what you need to do to get your crypto taxes done and ready with minimal headaches:
1. Before You Get To Calculation And Filing — Collect All Your Data
After accepting the fact that it is time to report your crypto activity, go to the first step of a fully accurate and complete report: data collection. The more thorough you are, the easier the next stages will be:
* Get A Full CSV From All The Crypto Exchanges You Use For Trading And Investing
* Make A List Of All Your Crypto Addresses From All Wallets
* If You Received An Income In Crypto — Collect All Relevant Records
* If You Received Crypto As A Gift, Donated Crypto, Etc., Collect Those Records As Well
* If You Engaged With Crypto Mining, Collect All The Relevant Data Available
* Collect All Records From Airdrops And Forks You Have Received
2. Choose The Right Calculation Method For You
Did you get into crypto early and trade over the years when prices went up? If so, specific identification is the method for you.
Did you buy your first crypto in late 2017 and only sold a few times since then, when the price was at its lowest? You can consider using the first in, first out method.
Make sure you understand each method and its implications for you.
You can save a lot of money by choosing the right method.
The new IRS guidance provides instructions on how to perform specific identification and determined that if you cannot specifically identify your crypto, you should use the FIFO method.
While the specific identification method identifies the exact Bitcoin (BTC) a user has sold, and calculates the user’s tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the FIFO method does not take real-time user activity into consideration, which could result in overtaxation due to the calculation process of all purchases and all sales.
In order to calculate using the specific identification method, you have to identify — using evidence from the blockchain — the purchase dates and sales dates of all Bitcoin that came in and out of your wallet for the same tax year.
Then, you must match the purchase and sale dates and prices of the same Bitcoin using blockchain data, and finally calculate the tax liability.
3. Use The Right Crypto Tax Calculation Platform
Choose a platform that will make sure you have a full report, alerts you of missing information, helps you understand what is the right calculation method for you, and meets all IRS requirements.
4. Understand Which Tax Form Is Applicable For You
If you have capital gains, use Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.
If you need to report an ordinary income from crypto, use Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income, as applicable.
5. Better Safe Than Sorry
If you are not sure you got it right, consult a tax professional.
6. Be Aware Of Deadlines
It is a common mistake to forget the filing deadline and end up paying penalties. Individuals who do not get an extension from the IRS must report by April 15.
Crypto Tax Software Developers Get Serious About System Standards
A growing number of crypto tax software developers are trying to bolster their products’ technical credibility with the Certified Public Accountant’s (CPA) stamp of attestation.
Attestation is an independent review conducted by a CPA, whose report includes conclusions about the reliability of data, statements – or systems, in the case of software services.
Lukka and Verady, two competing developers, both announced on Jan. 21 their tax software solutions have received System and Organization Control (SOC) attestation reports from independent auditors. In doing so, the companies’ respective executives told CoinDesk, they are providing services that clients can trust.
“There have been too many instances where crypto enterprises have failed because they utilize systems to provide service that are suspect and become compromised,” said Lukka CEO Jake Benson.
Lukka and Verady both addressed others’ failures by turning to SOC. It’s a set of standards developed by the American Institute of Certified Professional Accountants (AICPA) to assist auditors and users in evaluating a system’s trustworthiness, said Mimi Blanco-Best, CPA, a senior manager at the AICPA and lead developer of its SOC services.
SOC 1 reports on a system’s reporting controls and SOC 2 reports on its handling of user data and data privacy. Within both levels, Type 1 reports evaluate that system’s control design (does it work properly in the moment) and the Type 2 reports evaluate operational efficacy (does it work properly over time).
Lukka received SOC 1 Type 2 and SOC 2 Type 2 attestation reports from Friedman LLP (who was once Tether’s auditor) on Jan 21. Verady’s “Legible” tax platform received SOC 1 Type 1 from Cohen and Company.
Blanco-Best, the AICPA product manager, said SOC attestation reports help a business, and its clients and partners, judge a system and manage risk.
“If I get an SOC report – let’s say an SOC 2 report – that gives me some comfort in the service provided by an organization, that the organization using my data is handling my data properly,” she said.
Comfort leads to trust, and trust builds relationships with otherwise skittish clientele, Verady CEO Kell Canty said. He added that Verady is continuing to work with Cohen and Company to secure the Type 2 report.
Lukka’s Benson said SOC attestation reports help companies break into wider markets, especially with institutions: “They won’t even do business with a software company if they don’t have one.”
IRS Does Not Consider Fortnite Money As Virtual Currency After All
The Internal Revenue Service (IRS) removed wording on its website that put game currencies as examples of a convertible virtual currency. This clarification is important as a new tax filing requirement obliges taxpayers to report whether they dealt with virtual currencies.
The move was first reported by Bloomberg Tax on Feb. 13. Official guidelines on the IRS website indicated Fortnite’s V-bucks and Roblox’s Robux as examples of virtual currencies. A screenshot captured by Bloomberg Tax shows a fairly detailed explanation of the concept, even mentioning blockchain alternatives such as the Directed Acyclic Graph (DAG).
Poor Examples Of A Virtual Currency
The IRS definition of a virtual currency hinges on its ability to “operate like ‘real’ currency,” which means that it needs to be freely transferable between users and easy to exchange for fiat currency.
Spokesmen from Epic Games, Fortnite’s publisher, told Bloomberg that none of these apply to the game’s currency:
“V-Bucks cannot ‘be digitally traded between users,’ nor can they be ‘exchanged into, U.S. dollars, Euros, and other real or virtual currencies.’”
Roblox representatives voiced a similar stance, noting however that Robucks can be exchanged for fiat money under specific circumstances. The transaction is automatically submitted to the IRS, the company added.
The revised guidelines only mention Bitcoin (BTC), striking off a previously existing reference to Ether (ETH) — which should fall under the definition.
Aggressive Stance On Crypto
The U.S. tax enforcement agency has recently made a strong move in its efforts to curb perceived tax evasion facilitated by crypto. Form 1040 now features a straightforward question:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Categorizing game money as a virtual currency would have led to millions of people having to answer “yes” to this question. There are generally few profits to be made from owning game currencies, however.
Given that lying on the form can cost up to $250,000 in fines, this measure was likely introduced to force cryptocurrency users to go through the effort of reporting their gains.
Doing so is likely to be quite complicated. For example, each crypto-to-crypto exchange is considered as a taxable event that has to be reported. Though some hoped that these fall under the definition of a “like-kind exchange,” an IRS official denied this. This definition would have meant that cryptocurrency gains are only taxed when converting to fiat currency.
Cryptocurrency taxation remains an unclear subject, with worldwide regulators having widely diverging approaches. As an example, France does not tax crypto-to-crypto transactions.
A new bill recently proposed in the U.S. Congress could ease the use of crypto for payments by exempting low value transactions from tax returns.
Blockfolio And Tokentax Join Forces To Make Taxes Easier
The deadline for filing 2019 taxes in the United States is quickly approaching. Even for those declaring traditional income, the process can be lengthy to say the least. One of the biggest challenges for crypto holders in the US and beyond is how to declare their crypto assets and not run afoul of the IRS.
Tax Season For Cryptocurrency Holders Made Simpler
Blockfolio and Token Tax are trying to make this process easier for US residents. TokenTax is a platform for crypto investors which can analyze data from crypto transactions and generate the appropriate tax forms, while Blockfolio is a mobile cryptocurrency portfolio. By integrating these two, users can track crypto in Blockfolio, sign up for TokenTax, and immediately be given the option to import all their transactions. TokenTax co-founder Alex Miles notes:
“One of the biggest time sinks for users is how they get their transactions into the Token Tax system. Given how many people already track their transactions in Blockfolio, an integration just made perfect sense.”
As one of the leading networks for mobile cryptocurrency portfolio tracking and management, Blockfolio CEO Edward Moncada agrees:
“We’re thrilled that through this integration and partnership, the already massively time saving TokenTax experience becomes even easier for our users.”
This integration means current Blockfolio users who have already entered their transaction data don’t have to repeat their work on tax forms. All cryptocurrency holders should remember that false or incorrect reporting of assets on their US taxes can lead to major fines.
The IRS Is Inviting Crypto Firms To A ‘Summit’ In DC Next Month
The Internal Revenue Service has invited a number of undisclosed crypto startups to a summit on March 3 to discuss its existing approach to taxing cryptocurrencies as well as enforcement efforts, according to a copy of the invitation obtained by CoinDesk.
Bloomberg Tax first reported the news Tuesday. An IRS spokesperson confirmed the summit is set for next month.
The summit, to be held at IRS’s Washington, D.C. headquarters, will consist of four panels addressing technology, issues faced by exchanges, tax returns and regulatory compliance. A list of panelists has yet to be finalized.
Kristin Smith, executive director of the Blockchain Association advocacy group, told CoinDesk the IRS has been looking into setting up a summit since at least last month, when it reached out to industry participants for suggested panelists.
“My understanding of the event is this is going to be something where the IRS is going to use this as an opportunity to learn from [participants] in the ecosystem but [it] may help inform IRS’s thinking,” she said, pointing to compliance with existing regulation and guidance as one area on which the agency is focused.
While the IRS has not explicitly said the summit will inform its future guidance, Smith said she hopes the agency will use the information it gathers from the event to develop better regulatory frameworks around cryptocurrency moving forward.
The news comes days after the Government Accountability Office, a Congress-funded watchdog for government agencies, announced the IRS had declined to adopt several recommendations to clarify its existing guidance.
The IRS published fresh guidance around cryptocurrencies last autumn, addressing hard forks, how to calculate gains and valuing crypto income. However, the guidance, the first published since 2014, raised new questions around airdrops and did not address small transactions.
IRS Crypto Tax Return Question — Be Careful How You Answer
When you file your taxes this year, the Internal Revenue Service will ask you a simple question: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It’s pretty simple, just yes or no, right? What could go wrong? It’s not really asking for numbers or any detail, though if you sold some it should go elsewhere on your tax return. After all, since the IRS classifies crypto as property, any sale is going to produce either a gain or loss.
Perhaps the IRS is just surveying who is using crypto, you might guess? Not necessarily, and a simple yes or no box can turn out to be pretty important. In fact, given the IRS’s track record with offshore bank accounts, it could even mean big penalties or even jail.
The new IRS question appears at the top of Schedule 1 of your 2019 Form 1040. It explicitly asked if you received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during the year. Tax-savvy people will probably recognize that this is quite reminiscent of the foreign bank account question included on Schedule B.
That is, the question could even set you up as committing perjury for checking the wrong box. Thus, if a taxpayer answers “no” and then is discovered to have engaged in transactions with cryptocurrency during the year, the fact that they explicitly answered no to this new question (under penalties of perjury) could be used against them. So, if you did any of the listed things, you check yes, right?
What if you just have a kind of “signature authority” over crypto owned by your non-computer-savvy parents or other relatives? That way, you can help them manage their crypto. If you sell a parent’s crypto on their behalf, at their request and/or for their benefit, should you answer “yes” or “no” to the question? Either way, should you attach an explanatory statement to the return explaining your relationship to the virtual currency?
There probably aren’t perfect answers to these questions. But what is clear is that answering “no” if the truth is “yes” is a big mistake. Skipping the boxes entirely might not be as bad, but it isn’t good either if the truth is “yes.” If the truth is “yes,” say so, and remember to disclose and report your income, gains, losses, etc. Maybe that’s the point of the question: to be a prominent reminder.
If this makes you realized that you forgot to report your crypto gains in past years, considering amending to fix it. Don’t wait for the IRS to find you, even if you did not get one of those 10,000 IRS crypto warning letters last year. Just remember, the IRS is quite interested in crypto and is taking steps to unearth those who do not report.
The IRS appears to believe that millions of transactions might still be unreported. Taxpayers may think they will not be caught, but the risks are growing — and the best way to avoid penalties is to disclose and report as accurately as you can. IRS Commissioner Chuck Rettig has even moved to increase criminal investigations, too. Last year’s IRS letters to 10,000 crypto taxpayers were just the start.
The new crypto tax question on Form 1099 should tell you something. After all, the Department of Justice’s Tax Division has successfully argued that the mere failure to check a box related to foreign account reporting is per se willfulness. Willful failures carry higher penalties and an increased threat of criminal investigation. The IRS’s Criminal Investigation Division is even meeting with tax authorities from other countries to share data and enforcement strategies to find potential cryptocurrency tax evasion.
Major Crypto Exchanges Lament Outsized Scrutiny From US IRS
Representatives of major crypto exchanges today told the United States Internal Revenue Service that they want to see clear regulations rather than vague suspicion from the tax authority.
In a March 3 panel that is a continuation of a broader crypto summit at the IRS building in Washington, D.C., representatives from Coinbase, Kraken, and major accounting firm RSM US LLP argued that the crypto world had experienced outsized scrutiny from regulators compared to its size and darkness.
U.S. Crypto Exchanges Say They Aren’t That Scary
The representatives from Coinbase — head of global tax information reporting Sulolit Mukherjee — and Kraken — head of global tax Lisa Askenazy Felix — both said that the industry had seen more scrutiny than was merited.
“Even the biggest companies within our space are really not the huge, publicly reported companies right now,” said Askenazy Felix:
“Because it’s such an emerging industry, we are still very much trying to react to all these different developments in all these domestic jurisdictions we might be doing business in and all these foreign jurisdictions we might be doing business in.”
Mukherjee agreed, continuing to affirm that these companies have every reason to cooperate. “There is no benefit to a Coinbase or a Ripple to not doing the right thing,” he said.
The Coinbase executive continued to say that they were seeing excessive pushback from regulators, quipping that “Tax people are not always the most welcoming people in business conversations.”
Overregulation And A Lack Of Clarity
Agreeing with the crypto executives was Jamison Sites of RSM. “All the big players in this industry — Coinbase, Kraken — they’re very much startup companies,” Sites said.
“We’ve seen a number of our clients, we’ve seen a number of non-clients who talk to us — it’s hitting their bottom lines.”
Sites offered a hypothetical instance of overregulation: “Imagine if email in the 80s, when all these startups were coming in, imagine that the US Postal Service came in and said ‘hey, this is unlawful delivery.’”
Askenazy Felix summarized, “I think most of us in the room would agree that there is no clarity today.”
This panel on crypto exchanges is part of a broader March 3 event that the IRS initially invited crypto advocates to in mid-February.
From Taxes To Transparency: The IRS Gets Schooled On Crypto
It is no secret that the United States Internal Revenue Service is working to cope with the unique challenges of taxing cryptocurrencies.
In the first of a series of panels today, March 3, four experts spoke about recent advancements in cryptocurrency technology and the challenges and opportunities they present for regulators.
Public Ledgers Offer More Transparency To Regulators
Jesse Spiro, global head of policy & regulatory affairs at crypto analysis firm Chainalysis, was especially optimistic about the promise that public ledgers hold for regulators — unsurprising, given Chainalysis’s work tracking transactions on such ledgers.
“As technology continues to develop, I think that is going to be a primary concern when it comes to crypto,” said Spiro. “Some people will immediately raise the flag of ‘there needs to be better security.’”
Spiro continued to advance the transparency of the blockchain as an advantage to regulators: “You’re going to see that transaction lifecycle. […] As an investigator, you have a wallet address.”
An audience member who had believed that Bitcoin’s charm lay in its anonymity asked: “So that’s a myth?” Spiro affirmed, “That is a myth.”
Accessing Centralized Data Within Decentralized Ledgers
Despite the potential of blockchain technology, other panelists brought up considerable drawbacks.
Crypto-focused tax software firm Lukka’s director of customer success, Robert Materrazi, brought up the major issue of data centralization among exchanges. Particularly, he challenged Spiro’s confidence in the total availability of blockchain data on the basis of the many exchanges that maintain their own centralized and inaccessible ledgers in order to save transaction fees on the blockchain.
Materrazi said this was less of an issue for U.S. regulators dealing with compliant U.S. exchanges, but maintained that the cast of characters is wide:
“There’s hundreds of those exchanges around the world, there’s new businesses forming […] so it makes it very difficult to control all that data.”
Various Jurisdictions Mean Varying Regulations
Materrazi’s concerns especially touched on exchanges based in jurisdictions with minimal controls. This phenomenon likewise troubled Arnold Spencer, general counsel at Bitcoin ATM operator Coinsource.
Contrasting the situation with his firm’s compliance in the U.S., which he asserted was top-of-the-line, he brought up Argentina:
“We, for a lot of reasons, are interested in Argentina. […] We sought out what we would need to fulfill regulations and that means anti-money laundering, and it turned out there were none.”
Spencer continued to outline the problem of diverse laws within the United States itself, naming New York, with its BitLicense, as the leader of the pack in terms of regulation. However, he noted that many U.S. crypto companies choose to operate in states with less robust laws.
The IRS And Crypto
The IRS issued its first guidance on crypto in 2014, which was only updated recently, in October of 2019.
The full application of October’s guidance has been the subject of some debate, which, as tax time nears, grows in significance.
In December, a group of congresspeople wrote a letter to the IRS asking for greater clarity than even the new guidance provided.
IRS Crypto Summit Was About The Exchange of Ideas, Not Tax Guidance
WASHINGTON — “We might be overcomplicating things,” an audience member at the Internal Revenue Service’s crypto summit said midway through the first panel.
The IRS hosted four panels Tuesday, discussing technology, exchanges, the tax filing process and regulatory guidance in a daylong session uniting industry stakeholders, tax experts and regulators. The goal: Sort out some of the questions and concerns the broader crypto-holding public has about reporting its taxes.
While there were no answers and no new guidance for the industry (though virtual currency did make it to the IRS’s priority guidance plan published Friday), the event still represents a step forward for the opaque regulatory agency, which in a decade has only produced two pieces of binding guidance and published some non-binding documents for taxpayers and financial advisors.
“There’s a clear desire from both industry and regulators to understand this,” Chandan Lodha of CoinTracker told CoinDesk.
Financial advisers want to ensure they don’t have their clients fulfill costly reporting requirements only to discover they didn’t need to, EY partner Michael Meisler said during a panel. At another point a Coinbase vice president asked for clarity about reporting forms.
On the IRS side, numerous agency employees filled the auditorium with questions of their own, asking for clarity on how blockchain forensics works on a technical level, how privacy coins differ from cryptocurrencies like bitcoin (BTC) and even just what specifically they could do to simplify the process for taxpayers.
There is some frustration on the industry side at the lack of existing guidance, and the event did not indicate that any new guidance will be forthcoming. Still, Lodha said the event was a positive step.
Unlike traditional panels, where a moderator asks panelists questions, the IRS event seemed geared from the outset to let audience members and even panelists ask IRS officials to clarify existing tax guidance and address lingering questions.
Calculations And Filing
Specific questions included the best ways to calculate cost basis, how to treat coins bought from different exchanges or transferred between exchanges, whether microtransactions can be exempted and how to marry what tax code says with non-binding guidance published by the IRS so far.
“It would certainly be more helpful … if there was published guidance rather than just these frequently-asked-questions because in the absence of that, what we have is, ‘Well, this isn’t really authority,’” said EY’s Meisler, during a panel on tax return preparation.
It was a common refrain.
Audience members and panelists alike – including Kraken Head of Global Tax Lisa Askenazy Felix, Coinbase tax VP Kyle Zander and American Institute of Certified Public Accountants (AICPA) senior manager Amy Yiqiong Wang – said a lot of confusion stems from the fact that a lot of cryptocurrencies still don’t fall neatly into any existing tax laws.
“The rules don’t exist today to tell you exactly [how] to [file taxes],” Askenazy Felix said during a panel on exchanges.
EY’s Meisler told CoinDesk after the event that he believed it went well, noting IRS Assistant Deputy Commissioner John Cardone opened his panel by telling audience members the tax collector was looking for specific issues of interest to the industry.
“The people that were there from industry were asking questions that were very targeted, whether they develop software that conducts tax calculations or they were from exchanges, they were asking specific questions,” Meisler said.
One key detail that remains unclear is how exactly taxpayers can calculate the value of their digital assets.
The IRS has indicated in its frequently asked questions that individuals who buy and sell crypto at different times can use a method like “first-in-first-out,” meaning if you buy bitcoin in January, March and April and sell in July, August and September, you would calculate the difference in price between the first bitcoin you bought in January and the first bitcoin you sold in July.
However, this may not actually be allowable.
AICPA’s Wang said during a panel the tax code says users “should use specific identity,” meaning the cost should be calculated on the actual specific bitcoin being transacted.
“So there is no binding authority at the moment that allows you to use anything other than specific identification,” she said. “It’s really important for practitioners that the IRS comes out with clarity and guidance saying you can use other forms of tracking basis.”
While there were specific questions, various IRS officials also asked what the crypto industry might see as more basic questions – including “what is an API,” what regulatory arbitrage is and how cryptocurrencies are transacted.
“I’m getting the sense there’s a wide array of sophistication in the room,” said Coinsource’s Arnold Spencer during a panel on technology updates.
Meisler told CoinDesk that having individuals who appeared to have different levels of understanding about the crypto space and technology is not surprising, and having everyone in a room together was likely a good thing.
“Before someone can answer ‘How do we tax cryptocurrency?’ or ‘How do we tax a hard fork or an airdrop?’ it’s helpful to understand what the mechanics of those transactions are,” he said.
It’s unclear whether the IRS will be able to publish anything actionable in the near future. However, there are some steps it can take immediately to clarify its existing guidance. Wang told CoinDesk that just moving its list of FAQs into the Internal Review Bulletin would provide some clarity, a view Meisler echoed.
Because the FAQs are not published in the bulletin, they’re not binding guidance; the IRS can change any recommendations on it as it wishes, which the agency has actually been doing, Wang said.
Some of the questions on the FAQ now appear at different points than when first published.
Turning these questions into binding guidance would give financial advisors and taxpayers the comfort of knowing they were looking at proper legal guidance, which could prevent them from inadvertently violating the tax code.
Crypto.com Simplifies Crypto Tax Reporting For Its Users
Payments and cryptocurrency platform Crypto.com has simplified cryptocurrency tax reporting for its users through a new partnership with three tax providers.
On March 24, Crypto.com announced the collaboration with crypto tax calculator CoinTracker, crypto tax software platform TokenTax and crypto tax reporting firm CryptoTrader.Tax.
Now, Crypto.com’s users can import their historical crypto transactions from the platform into one of the aforementioned tax reporting platforms to generate necessary tax reports. Users then can pass the forms along to a tax professional or transfer to tax filing software for further processing.
A Response To Crypto Taxation Around The World
The new option comes in response to growing crypto adoption, as well as new requirements from regulators around the world making cryptocurrency owners report on their holdings. Thus, last summer, the United States Internal Revenue Service (IRS) began asking digital currency holders to amend their tax filings, while compelling others to pay back taxes and interest and penalties.
At the time, the IRS said that it was focused “on enforcing the law and helping taxpayers fully understand and meet their obligations.” Last October, the IRS issued its guidelines for crypto-based tax reporting, requiring roughly 150 million American taxpayers to answer the question whether they received, sold, sent or exchanged any virtual currency.
At the same time, most members of the European Union have a radically different approach to tax codes to govern their respective crypto sectors. For example, in Germany, Bitcoin (BTC) is not subject to any capital gains tax, thereby allowing investors to avoid paying significant levies on their holdings if the value of their BTC appreciates.
Bitcoin for Business: The Tax Guide
During 2019 alone, thousands of merchants worldwide were accepting Bitcoin (BTC) as a payment method. Despite this, a lot of current and would-be merchants are confused about how to pay taxes on their cryptocurrency sales.
This guide was created by a United States business owner that advocates for cryptocurrency and a crypto tax expert to cover both practical aspects and tax tips for businesses that wish to accept cryptocurrencies. So whether your clients are asking or you desire to support the growth of the crypto ecosystem, here is the right way to do it.
Cryptocurrency Tax Law Varies By Country
Each country has its own tax rules. Some, such as Portugal and France, look favorably on cryptocurrencies, while others like the U.S. and the United Kingdom take a more conservative approach to the asset.
Use the guide above to understand the implications in your country. Keep in mind that a country may use one set of laws for individuals and another for businesses. For example, in Portugal, the laws are more advantageous for individuals.
The rules can also differ from one business to another. In some countries, there are different tax rules for self-employers, companies, corporations and small businesses.
In the U.S., when you receive virtual currency in exchange for performing services, whether you perform the services as an employee or not, you recognize ordinary income. For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.
Make sure you understand whether the current tax rules apply to your business. If you are not sure what rules apply to you, consult a local tax professional.
You May Be Able To Eliminate The Volatility Of Crypto
The volatility of crypto is an issue that affects everyone who ever considers paying with crypto, but if you have a business, you need to take a moment and think about the implications.
There are two main ways to combat volatility. First, accept cryptocurrency payments through third-party service providers like BitPay.
For a fee (as low as 1% in the U.S.), you can instantly get fiat whenever someone is paying you with crypto. Most of those companies are also taking care of the invoicing and record-keeping procedures and dealing with the mandatory Anti-Money Laundering and Know Your Customer requirements.
Taxwise, this option is also very easy: If the crypto is immediately converted into fiat, you are paying tax for regular business income.
The main disadvantage of these companies is that they cannot provide services to everyone. Depending on the type of company and your jurisdiction, you may not be eligible for these services.
The second way to deal with volatility is to either accept stablecoins or instantly convert other cryptocurrencies to stablecoins.
If you choose this way, you will need to issue the invoice for the payment yourself. There are some bookkeeping platforms that support crypto payments, such as Coinbase Commerce.
Since stablecoins are not entirely nonvolatile, when you sell the stablecoins, you will need to check your tax implications, which depend on you and your business’s country of tax residency.
Now that we’ve covered the basics, let’s get to the practical aspects.
Record Every Sale
The first step is easier than you think. For every sale, you need to record the sale date and transaction amount as you would for fiat.
If you use a service like BitPay that instantly converts 100% of the sale to fiat currency, then you are done. Record the final amount minus the transaction fee. Same as you would for a payment processor.
If you do not use third-party payment services, in addition to the fiat amount, make sure to record fair market value amount in crypto. For reference, $50 USD at the time of writing this article is 0.0058 BTC.
Fair market value, or FMV, is typically defined as the selling price for an item to which a buyer and seller can agree.
Cryptocurrency value is determined by the cryptocurrency exchange and recorded in U.S. dollars. However, when it comes to peer-to-peer transactions or other transactions not facilitated by an exchange, the FMV is determined by the date and time at which the transaction was recorded on the blockchain.
The amount of income you must report is the fair market value of the virtual currency in USD when received. In an on-chain transaction, you receive the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.
Additionally, you will need to determine the cost basis for the crypto you have received.
Cost basis is the original value of an asset for tax purposes. For digital currencies, the cost basis is the amount you spent to acquire the digital currency, including fees, brokerage commissions from exchanges, and other acquisition costs in U.S. dollars.
If you provided someone with services and received digital currency in exchange, your basis in that digital currency is the fair market value of the digital currency in U.S. dollars when it is received. For more information on basis, see Publication 551, Basis of Assets.
The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns.
For cryptocurrency payments, it means documenting receipts, sales, exchanges or other dispositions of digital currency as well as the fair market value of the digital currency at the time of transaction.
Now it’s time to “cash-out” into fiat. Because the BTC price fluctuates, each sale has a unique value in BTC.
Cryptocurrency Transaction Log
We send the 0.0269 BTC to an exchange and sell it for 290 USD. There is a 40 USD gain due to appreciation of the Bitcoin price.
When you earn money between the time of sale and the crypto-fiat conversion, you probably need to pay capital gains tax.
It depends on the country, but in the United States, we would calculate the time between the initial sale and the crypto-to-fiat conversion.
In our example and most others, the crypto-to-fiat trade that occurred within 12 months of the crypto purchases will be considered short-term capital gains.
If you decided to hold your crypto for over a year, then the profit would be considered long-term capital gains.
Many people don’t know it, but cryptocurrency tax liability can be significantly reduced by crypto tax planning. The new IRS guidance enables you to plan your taxes by choosing which particular Bitcoin to sell.
Therefore, you can choose to sell the same Bitcoin you purchased when the price was high now at a lower price. This can assist you in optimizing your tax liability. This tax planning method calls for the use of specific identification, a common way to calculate and plan taxes in many countries.
What About The Miscellaneous Transaction And Withdrawal Fees?
This one is straightforward. They are considered expenses, just like traditional banking or processing fees. The fees will reduce your cost basis.
What About Crypto Refunds?
Let’s say a customer wants to return an item and is granted a full refund. Bitcoin has gone up since its purchase. Do we refund their original amount of Bitcoin or the current USD equivalent?
This is usually a case-by-case decision, but most businesses will refund the USD equivalent at the time of purchase because the unit of account is (almost) always in fiat currency.
No matter what you choose to do, make sure you report it correctly and reduce the tax calculation consistently. Keep all fair market value records of the payment receipts and the refund.
We hope you have a bit more clarity on the tax implications for your business. Pay attention to updates as crypto tax regulations evolve in the 2020s.
The Tax Man Cometh — Who Will Pay for the COVID-19 Stimulus?
Could this be the year the world gets serious about cryptocurrency taxation? The coronavirus pandemic, after all, could cost the global economy as much as $4.1 trillion — or almost 5% of global gross domestic product — according to the Asian Development Bank. Governments will soon be looking to tap all possible income sources to balance their budgets, including crypto, say tax experts.
“At some point, somebody is going to have to pick up the bill” for the COVID-19 pandemic and its associated economic stimulus packages, Peter Brewin, a PwC tax partner in Hong Kong, told Cointelegraph, adding: “We can expect revenue authorities to be under pressure to collect more taxes. I see no reason to believe that cryptocurrencies will be immune to this.”
In tune with this, on April 1, the Spanish tax authority began sending out warning notices to 66,000 cryptocurrency holders to remind them of their tax obligations, as Cointelegraph reported. “It’s the Willie Sutton question,” Richard Ainsworth, an adjunct instructor at Boston University’s School of Law, told Cointelegraph. “Why do you rob banks? It’s where the money is. Clearly, untaxed money is in crypto. There will be activity, and it will be significant.”
Paul Beecy, a tax services partner at Grant Thornton, told Cointelegraph that there is heightened awareness of cryptocurrency now in much of the world, and more attention is likely to be directed toward taxing Bitcoin (BTC) and other cryptocurrencies this year.
But not everyone concurs. “The IRS and other agencies around the world will be stretched thin with the ‘direct’ tax fallout resulting from the pandemic, like administering relief programs,” Omri Marian, a professor of law at the University of California, Irvine, told Cointelegraph, adding that there isn’t enough revenue to be collected from crypto assets to make them a major priority for tax agencies. “I expect tax enforcement in the context of crypto assets to be about the same, or lower, going forward.”
The Crypto Taxation Challenge
Cryptocurrency taxation has long been problematic. An individual in the United States, for example, may have to pay a capital gains tax when purchasing a single cup of coffee with BTC. The U.S., however, isn’t unique in this regard. Grant Thornton’s Beecy regularly asks his non-U.S. colleagues about their country’s treatment of Bitcoin purchases. Most, like in the U.S., have to keep track of every purchase (at least in theory), including cups of coffee.
“Yes, it’s a taxable disposition. Germany is an exception: Under rule 23 EStG, Germans can trade crypto tax-free — provided that their capital gains do not exceed a total of 600 euros per year,” he told Cointelegraph. Germans pay no capital gains at all if the crypto is held for more than one year.
According to Brewin: “Most countries do not have specific tax laws for cryptocurrencies. Instead, they try to fit the taxation of crypto assets into existing tax laws and many have started to issue guidance on how they interpret existing laws.” One problem here is that it has led to inconsistent treatment around the world.
Three Tax Structures
Brewin breaks it down into three basic tax regimens in different global jurisdictions. Individual residents in Group 1 jurisdictions such as the U.S. and the United Kingdom (by far the largest) should almost certainly keep records on all of their crypto spending and may have to pay taxes on any gains they make when they use their crypto to buy goods or services. These countries apply a broad-based capital gains tax, and Brewin believes that “it’s very unlikely that such jurisdictions are going to make changes to their capital gains tax regimes to exempt crypto assets.”
Group 2 residents — e.g., Hong Kong, Singapore — enjoy an advantage over those in Group1, as those jurisdictions do not levy taxes on capital gains. Therefore, there is no need to keep records of or calculate tax on their gains/losses with regard to crypto spending “as long as they are not deemed to be in a business of trading in cryptocurrency,” said Brewin.
Group 3 jurisdictions like Portugal and Malta do not require taxes to be paid, but this could change, depending on whether the current treatment has arisen by accident (i.e., the rules just haven’t been updated fast enough to include crypto) or by design — that is, an explicit government policy decision to exclude the asset class.
For Group 3, crypto could be subject to future legislative actions — particularly if governments are looking to raise income in a post-COVID-19 world, observed Brewin, adding: “The tax treatment may differ depending on the type of asset — e.g., securities tokens may be treated differently from payment tokens like Bitcoin.”
“Not The Best Outcome For The Tax Guy”
“Crypto has special attributes that make taxing it very difficult,” said Ainsworth, adding that, for instance, it’s often difficult to attach names to transactions. Taxing cryptocurrency primarily through an income tax — as opposed to a sales tax, or VAT — leads one inevitably to a property tax/capital gains outcome.
“So, David Hedqvist who just buys Bitcoins low (for Swedish Crowns) and sells Bitcoins high (for Swedish Crowns) has no VAT liability, just income tax,” Ainsworth explained, referencing the judgment in the Skatteverket v. Hedqvist case in the European Court of Justice and elaborating:
“That’s not the best outcome for the tax guy because we can find the transactions much more easily than we can find the people behind them. The further trouble with the income tax is that we get most compliance from the withholding (and third-party reporting) systems. It’s really not a ‘voluntary compliance’ system. We comply because the government knows about us.”
The whole idea of crypto, though, is that ownership is (semi) anonymous, which tends to neutralize the withholding and reporting systems, continued Ainsworth, who was the former deputy director of the International Tax Program at Harvard Law School. He added: “Unless we want to spend a lot of enforcement resources connecting people to crypto, we are really not going to get anywhere fast.”
Ainsworth suggested, instead, to demand a withholding (per crypto transaction) from the cryptocurrency exchanges because then “it would not matter who was engaged in the transaction, or what was involved in the transaction, just that there would be a charge (tax) involved in each transaction collected and reported by the exchange. The charge would be a flat percentage.”
The Portuguese Alternative
If crypto taxation is unwieldy, inconsistent and difficult to enforce in most jurisdictions, are there still places that are getting it right? In Portugal, for instance, individual crypto trades are not taxed — just trades from professional activities, that is, if trading crypto is a core business. Is this a better model?
The Portuguese way probably isn’t applicable to the U.S., suggested Beecy. With regard to Bitcoin, for instance, “the IRS has already given guidance: This is property and it is subject to taxation.” Is the government suddenly going to change gears — and exclude an entire asset class from taxation? That would be politically explosive, he suggested.
In most countries, tax outcomes for crypto assets are just a result of applying regular tax laws, said Marian. Most do not have a tax policy specifically designed for crypto assets, as appears to be the case in Portugal. “The only countries that I am aware of that designed specific lenient crypto assets tax policies are all traditional tax havens, and this tells you all you need to know.”
What’s The Endpoint?
Where, then, is the world likely to end up with regard to cryptocurrency taxation — if it is even possible to generalize? Beecy expects to see in the U.S., and maybe other nations, a bifurcated tax scheme with a split between digital investors and digital consumers.
The former will be subject to fairly onerous reporting requirements, but they will be assisted by software packages that automatically track and consolidate an investor’s transactional information — often linked to a digital wallet. The investor would have access to all buys, sells, gains, losses, as well as consolidated monthly reports and annual reports, “just like the typical brokerage accounts.”
Meanwhile, digital consumers will increasingly purchase everyday goods and services with stablecoins, which, while taxable in theory, basically have no gains or losses to compute. Crypto transactions — purchasing a shirt or a slice of pizza — will be fairly frictionless. Mazhar Wani, a PwC tax partner in San Francisco, agreed that stablecoins could play a role, telling Cointelegraph:
“In the context of taxes, the key problem with using crypto assets for day-to-day spending lies in its volatility compared with the local currency. The obvious solution is adoption of a digital currency that doesn’t exhibit this volatility versus local fiat currency — some form of stablecoin.”
Wani would like to see jurisdictions start viewing crypto and digital assets through a fresh lens — i.e., not as a property, currency, security or commodity — with an end toward “establishing one globally consistent policy and framework around it with some sort of de minimis exceptions to be established locally to minimize burdensome compliance, reporting and enforcement activities.”
A Role For The United Nations?
A more idealistic proposal was developed recently by Ainsworth and Tony Hu, a graduate student at New York University’s tax law program, in a working paper where they call for a supranational and trusted body like the United Nations to administer tax revenues raised by a transaction tax on exchanges. As Hu told Cointelegraph:
“For example, when a jurisdiction is battling opioid pandemic, a plight typically associated with cryptocurrency, it could apply to the administering body [e.g., the U.N.] for appropriate funds proportionate to the crisis’s scale and severity and use the funds to reduce instances of overdosing and develop more advanced technology to detect opioids at port of entry.”
A supranational solution? “I think that’s aspirational,” commented Beecy. “I understand it, but the challenge is: Will nations give up their sovereignty?” This would mean that countries would have to relinquish their prerogative to tax the property of their citizens. Brewin, too, believes that most countries will strive to retain all their tax privileges, and he doesn’t foresee much global convergence on how crypto is taxed. The exception may be with respect to information reporting:
“I’d be very surprised if we don’t start to see tax authorities cooperating to require more disclosure from exchanges, custodians or wallet providers on their customers and then sharing this information with each other — for example via expanded applications of the common reporting standard.”
Beecy can see groups of central banks, like those in the European Union, developing cohesive policies to facilitate cross border digital currency transactions. But a crypto transaction tax with proceeds going to the U.N. to fight pandemics or the like? “I think that’s just a bridge too far,” he told Cointelegraph.
Fifth-Largest US Accounting Firm Partners With Crypto Tax Tech Company
Blockchain-native software and tax services company, Lukka, has been chosen to provide crypto taxation software to the fifth-largest accounting firm in the United States, RSM.
Cointelegraph spoke to Lukka CCO Jeremy Drane, and RSM senior manager of international tax and blockchain/cryptocurrency, Jamison Sites, to find out more about the partnership between the two firms.
Lukka Provides Crypto Tax Software To RSM Clients
The deal will see RSM’s tax clients provided with the ‘Lukka Crypto Office’ and ‘LukkaTax for Professionals’ software to assist the tax preparation needs of both individuals and enterprises.
Jamison Sites states that RSM began researching various crypto tax software providers after having conversations with the U.S. Treasury and Internal Revenue Service (IRS) in late 2018 and early 2019.
From the discussions, Sites asserts that “RSM understood that upcoming IRS guidance would require our digital asset clients to prepare a much more complicated calculation going forward.”
After evaluating the crypto tax software sector, RSM chose Lukka based on its “scalable infrastructure” and “focus on delivering highly specialized tax capabilities unique to crypto assets.”
RSM Engages Lukka In 2018
While talks regarding the current partnerships began during August 2019, Sites states that RSM engaged Lukka late in the 2018 tax-year regarding a client who urgently needed roughly $20 million worth of crypto trades to be calculated.
“[W]e had a client that needed an urgent basis calculation for a large volume of trades, roughly 20 million. Lukka’s team came through with impressive results,” he states.
Lukka CCO Jeremy Drane states that the two firms “have been collaborating and working on client-specific crypto tax issues” since RSM first engaged Lukka.
“Since then, the two firms maintained regular correspondence to discuss market news as well as tools and features the RSM tax teams desired in a digital asset software,” he said.
Lukka Launches Academic Repository For Crypto Tax Issues
During March, Lukka launched its ‘Lukka Library’ — comprising an interactive repository of academic work dealing with crypto taxation issues.
The library includes resources covering more than 75 topics and authored by more than two dozen academic and legal experts.
IRS Seeks Third-Party Contractors To Help With Taxpayers’ Crypto Calculations
The United States Internal Revenue Service is reportedly soliciting outside contractors to assist with calculations of cryptocurrency users’ transactions.
The United States Internal Revenue Service (IRS) is reportedly soliciting third-party contractors to assist with calculations of cryptocurrency users’ transactions.
Crypto tax software firm CryptoTrader.Tax publicly shared details of a letter it claims to have received from the IRS on May 12, together with an accompanying Statement of Work.
The latter has been uploaded to CryptoTrader’s blog, along with excerpts from the letter, which reportedly stated:
“The Internal Revenue Service is engaging outside contractors to assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency. We are placing a few single-case contracts as pilots with a goal of publishing a solicitation and request for proposal for a larger multi-case contract.”
The Statement of Work provides detailed information as to the type of services sought by the IRS.
CryptoTrader.Tax says it does not intend to pursue the contract, emphasizing its focus remains serving its customers and assisting them in their tax reporting obligations directly.
What Does The IRS Need Help With?
In order to support its examination of taxpayers using cryptocurrencies, the IRS is seeking a third-party to provide services that can help to aggregate, value and compute the gains and losses incurred by individuals’ cryptocurrency transactions.
This process may, in some cases, be relatively simple, the IRS notes, but in others transactions may be dispersed across multiple exchanges and digital wallets.
The IRS provides further insight into some of the challenges involved in handling crypto transaction data, noting that:
“Specialized technology and infrastructure is required to digest, contain, and analyze virtual currency data due to unique requirements such as but not limited to decimal place precision, varying field formats, and file formats.”
Beyond data management and analysis, the IRS seeks help with report preparation, data discrepancy analysis, error resolution and report revisions.
The contractor would also be expected to be present at taxpayer meetings and to assist the IRS with trial preparations. They would potentially be asked to testify at trials as a summary witness in order to explain the calculations derived from the underlying data.
Notably, the IRS reveals the scope of the data it expects to be marshalled for analysis and calculation, which could include but is not limited to:
“Publicly available on-chain data and private off-chain data; API keys obtained through exchanges, wallets; CSV, Excel or PDF files from various sources; paper documentation submitted by taxpayers; data obtained through merchant electronic systems; related data obtained by the contractor for valuation purposes.”
As reported, the IRS has released two recent pieces of detailed guidance for taxpayers who engage in transactions involving digital currency. These provide insights into hard forks and airdrops, recommended calculation methods and necessary documentation.
How You Could Save Money When Reporting Crypto Taxes
There is no denying that you should be paying taxes on your income from crypto, but how can you ensure that you are not paying more taxes than you owe?
Many crypto holders are reporting their crypto transactions for the first time as a result of the United States Internal Revenue Service’s question about “virtual currency” on the 2019 tax return form.
It is a big question for some taxpayers — many have not reported their crypto gains in the past or may have done so without a great deal of precision. Should a taxpayer let bygones be bygones or file an amended return to accurately reflect their historical income from crypto? The IRS subpoenas of crypto exchanges for taxpayers’ trading histories certainly raise the stakes. To layer more on, statutes of limitations, potential penalties and/or IRS leniency may vary based on the degree of previous noncompliance.
Decisions in one tax year have consequences in future years. This is because gain/loss amounts vary based on which crypto assets are treated as purchased or sold and when these trades occur. Sale of an asset in one year raises the question of how or when a taxpayer acquired that specific asset in the past. If an acquisition was the fruit of mining, staking or an airdrop that was not reported, a taxpayer may need to explain why this transaction was not reported as income on their previous year’s tax return.
Given the recent changes and uncertainties, new software has been designed for investors, traders and other participants in the crypto ecosystem. Such tax compliance software is necessary because, unlike traditional financial assets, trading and other activities in crypto are not reliably reported — or often not at all — on IRS information returns (such as 1099 forms).
Trading in cryptocurrency differs from trading in traditional financial assets in a variety of ways. This includes the movement of taxpayer assets across exchanges in nontaxable transactions, paying fees in capital assets (rather than cash), differing tickers from one exchange to the next, decimal precision and the unique transactions that only occur in the cryptosphere. These are some of the reasons why traditional or generic tax compliance software often falls short in serving the crypto ecosystem.
However, Not All Crypto Tax Software Is Created Equal:
- Some ignore fees associated with transacting in crypto that typically leads to an overpayment of tax on gains or an understatement of losses — which can be used to offset taxable gains. It’s important for your software to properly account for transaction fees so your taxable income is not overstated.
- Some do not properly address the uniqueness of crypto data, such as the differing tickers across exchanges for the same asset and varying decimal precision. Mistakes in these two areas can lead to inaccurate taxable income calculations and risk of an audit.
- Some do not provide sufficient flexibility for the particular taxpayer’s circumstances or blindly apply imprecise or generic tax principles. This rigidity can have adverse financial consequences for taxpayers in the absence of detailed IRS guidance. One example is the reporting of airdrops, mining and staking rewards where some taxpayers believe the IRS’s guidance is too broad when applied to different factual variations. Another example involves the potential for claiming ordinary, rather than capital, loss treatment for certain crypto assets. Ordinary losses are often easier to use for reducing taxable income.
- Some offer taxpayers accounting methods for crypto that are impermissible in the United States — e.g., average cost — without adequate warnings. Others do not support or display the benefits of tax optimizing methods that allow taxpayers to identify assets with the highest tax bases as the ones sold, a method known as highest-in, first-out.
- Some only match acquisitions and dispositions on a single exchange rather than across all of a taxpayer’s different trading venues. This can have a material impact on taxable income calculations. Generally, this will also result in non-optimal taxable income calculations when applying different accounting methods such as first-in, first-out, last-in, first-out and highest-in, first-out.
- Some were developed in a vacuum and not subject to the rigors of independent audits for Service Organization Controls relevant to software-as-a-service providers. Only crypto software providers with the highest level of internal controls for reporting, security, privacy and processing have both SOC 1, Type 2, and SOC 2, Type 2 certifications. The use of software without these certifications increases a taxpayer’s risks — both tax and non-tax related.
The list goes on, and there are even more points that can be made in choosing the right crypto tax software for an area where there is little specific tax guidance. The lack of specific guidance for crypto does not mean that there are no rules, however. It just means that a finer-tooth comb is needed to determine which tax rules apply to crypto, and how that application differs from traditional financial assets.
There can be advantages to such an analysis that can significantly reduce tax expenses or increase a taxpayer’s refund. A flexible tool is often needed to help users make informed decisions that can ultimately save taxes or increase a refund.
Crypto Taxes Are Due July 15, But Be Careful — You May Need More Time
The Internal Revenue Service has already changed its deadlines to July 15, so if you are not ready to file your crypto taxes in a month, you should ask for an extension.
Tax day this year, like everything else, is different. The United States Internal Revenue Service has rescheduled it to July 15, but there’s little time left to get your records together and to file. Everyone knows the IRS is pushing hard to scrutinize crypto. A new IRS question appears at the top of Schedule 1 of your 2019 Form 1040 asking if you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency at any time during the year.
As the IRS classifies crypto as property, any sale should produce a gain or a loss. Perhaps the IRS is just surveying who is using crypto, you might guess, but a simple “yes” or “no” can turn out to be pretty important. The question could set you up for facing big penalties or even committing perjury. Instead of rushing to file your taxes, should you take an extension to Oct. 15?
For many, I say: “Yes.” It is automatic on request and incredibly easy to do. But should you take advantage of the extra time? It is tempting to succumb to the allure of the extra months, but there are those nagging questions. If you extend, do you increase your odds of an audit? Conversely, maybe you actually decrease your audit odds — or are they the same?
There’s no shame in an extension. Millions of them are processed every year. Everyone can automatically get an extension until Oct. 15 by filing a short form electronically or by mail. It doesn’t even require a signature. It couldn’t be easier.
Of course, the extension is just to file your tax return; it is not an extension of when you have to pay. Thus, this year you still need to pay by July 15 — normally by April 15 — what you expect to owe when you actually file your taxes later in the year, which can be done anytime up until Oct. 15. But are there good reasons to take the extension? You bet.
Do you have all the forms you need, such as Form 1099-K? How about K-1s from all partnerships and limited liability companies? They have an annoying habit of showing up late, and they are often amended. That can be a big reason to extend.
Besides, taking an extension encourages reflection. Many returns filed right at the deadline are completed in haste, some carelessly. And that can bring on an audit.
Extensions allow time to gather records, consider reporting alternatives and get professional advice. Remember, tax returns must be signed and filed under penalty of perjury. It is best to file accurately so you don’t have to amend later.
Amended returns often come about because people are in a rush. Amending a return isn’t necessarily bad, but amended returns are much more likely to be scrutinized. File once correctly so that you do not need to do it again.
The IRS doesn’t even have to approve the extension. It is automatic, and there is no discretion involved. You automatically get the extra time. This year, everyone got an automatic reprieve until July 15, but extending gives you until Oct. 15. Once you extend, you can file whenever you would like on or before Oct. 15. That time comes in useful in other ways too.
Taking an extension allows for corrected 1099 and K-1 forms. You may be waiting for K-1 forms, gathering documents or seeking professional advice. If there are debatable points on your return, take the time to get some professional advice.
Even if you have all your forms ready, what if you receive a K-1 or 1099 form after you file? It happens a lot. Taking an extension makes it less likely that you will be surprised by a tardy corrected Form K-1 or Form 1099.
There are plenty of stories about audit risk. The IRS does not release data about whether taking an extension increases or decreases your chances. Some people say that taking an extension increases audit risk, while some people say the opposite. There appears to be no hard evidence to prove either theory.
No one wants an audit. I say extensions encourage reflection and care, and that alone reduces audit risk. To extend, you can submit a Form 4868, ask your tax return preparer, use commercial software or do it yourself electronically. Be careful out there.
US Tax Court Says You Should Sell Your Crypto Savings If You Owe IRS
The US federal court sides with the IRS in a dispute involving crypto whales and unpaid taxes.
The United States Tax Court has affirmed the IRS’ decision to deny a Maryland couple an installment plan. They state instead that the couple should liquidate their $7 million cryptocurrency holdings to pay off the tax debt.
The couple, Alexander and Laura Strashny, failed to pay their 2017 tax return. As a result, they owe the IRS $1.1 million in unpaid taxes and penalties. In July 2018, they asked the IRS to allow them to pay the debt over a six-year installment plan, or IP.
Along with the IP request, they enclosed a special form to prove that they are eligible for the proposed scheme. In it, they mentioned earning more than $200,000 in annual wages and withdrawing $19,000 a month from their $7 million cryptocurrency account.
Having examined the form, the IRS ruled that the Strashnys are able to pay their tax liability in full, and denied the six-year installment plan. The debtors chose to challenge the agency’s decision in the US Tax court.
Now, the tax court has confirmed that the Strashnys failed to show why they couldn’t withdraw additional sums from their cryptocurrency account to pay off the debt.
As Per The Court Documents:
“The SO [settlement officer] concluded that petitioners were ineligible for an IA after determining that they could fully satisfy their tax liability by liquidating a portion of (or borrowing against) their cryptocurrency assets”
The IRS Doesn’t Forget About Crypto
In May, crypto tax software firm CryptoTrader.Tax shared details of a letter it claims to have received from the IRS. As per the document, the tax agency seems to be soliciting third-party contractors to assist with calculations of cryptocurrency users’ transactions.
The IRS has rescheduled this year’s tax payment to July 15 due to the COVID-19 pandemic., but it can be extended to October 15 upon request. The agency classifies crypto as property, meaning that any sale should produce a gain or a loss that should be reported.
One Month Left To Crypto Tax Season — 5 Critical Mistakes To Avoid
All you need to know to prepare for Crypto Tax Season 2020 and correctly inform the IRS about your crypto.
There is only one month left until the United States tax season. After being extended due to the COVID-19 pandemic, the official deadline to file tax returns is now July 15.
If you think that the U.S. Internal Revenue Service is all hung up on dealing with the COVID-19 stimulus package and will not carefully examine crypto reports — you had better think again. The IRS is taking steps to build cases against taxpayers who fail to report cryptocurrency, and after the new crypto tax guidance was published in October 2019, there are really no more excuses left to not report crypto activity.
So, If You Have Not Filed Your Returns By Now, Here Are The Five Critical Mistakes In Crypto Tax Reporting You Want To Avoid:
1. Do Not Report Only Part Of Your Crypto Activity
Cryptocurrency tax reports should be like any other tax report — true, correct and complete. Do not assume that you know which information the IRS has access to. The IRS can not only rely on the information provided with your standard tax return, but they can also combine information received from third parties such as crypto exchanges and payment systems, among others, to determine the validity of your crypto filing. Reporting only part of your crypto activity is not only gambling on the information available to the IRS, but it is illegal.
So, make sure you are collecting all of your data before submitting your report. This includes all your crypto transactions from all your crypto exchange accounts, all addresses from all your wallets, any income in or gifted crypto, mining activity, airdrops and forks.
2. Avoid Using Like-Kind Exchanges
U.S. tax law has a tax exemption for certain property exchanges called like-kind exchanges, under Section 1031 of the Internal Revenue Code. This is an asset transaction that does not generate a tax liability from the sale of an asset when it is sold to acquire a replacement asset.
The IRS clearly states that like-kind exchange treatment applies to real property and not to exchanges of personal or intangible property.
Moreover, the IRS has even specifically mentioned that like-kind tax exemption has never applied to crypto transactions.
3. Do Not Treat All Your Crypto Transactions The Same
Classifying Your Crypto Transactions Correctly Is The Only Way To Make Sure You Are Reporting Accurately. Remember:
* If You Received Payment In Crypto For A Service — It Is An Income.
* If You Are Mining Crypto — It Is Also An Income.
* If You Traded In Crypto, You Have Capital Gains Or Losses. It Is Important To Make Sure If Those Gains Or Losses Are Short Or Long Term.
4. Do Not Forget To Establish Fair Market Value For Peer-To-Peer Transactions
If you acquired or sold cryptocurrency in a peer-to-peer transaction or traded on a non-facilitated cryptocurrency exchange, you need to establish an accurate fair market value, or FMV.
The IRS will accept the evidence of FMV from a blockchain explorer that calculates the value of the cryptocurrency at an exact date and time. If you do not use a crypto explorer, you must establish the value as an accurate representation of the cryptocurrency’s FMV.
5. Using The Wrong Tax Form
After classifying your crypto transaction correctly, you need to make sure you are filing the right tax form. If you are not sure, or if you have more income and capital gain to report, you should seek a professional tax consultation.
If you have capital gains, use Form 8949, entitled “Sales and Other Dispositions of Capital Assets,” and then summarize your capital gains and deductible capital losses on Form 1040, Schedule D, entitled “Capital Gains, and Losses.”
If you have an ordinary income from crypto, use Form 1040, entitled “U.S. Individual Income Tax Return,” Form 1040-SS, Form 1040-NR or Form 1040, Schedule 1, entitled “Additional Income and Adjustments to Income,” as applicable.
Tax Time: Ernst & Young Release Crypto Tax App
A new crypto reporting app by the big four accounting firm EY will help clients with tax reporting as the IRS cracks down on tax evasion.
Multinational professional services firm Ernst & Young have released a crypto tax app called EY CryptoPrep. It’s a fully automated, web-based Software as a Service (SaaS) product to assist clients with U.S. tax filings.
EY CryptoPrep takes data from numerous exchanges and major cryptocurrencies, automatically applies relevant tax rules and completes Form 8949. Clients can choose to use the program themselves or have it as part of a managed service.
EY America’s Vice Chair of Tax Services Marna Ricker explained that the application was a direct response to growing interest in cryptocurrencies:
“Our clients increasingly hold and trade crypto assets, creating the need for an innovative solution to address the evolving complexity around filing crypto taxes.”
Cryptocurrencies have caused confusion and difficulty for many users due to stringent recording requirements for traders in addition to somewhat opaque tax regulations in certain cases.
The IRS Cracks Down
The application arrives just in time as the IRS looks as if it’ll be cracking down on non-compliance in cryptocurrency tax. In May this year, they sent out a Statement of Work (SOW), soliciting private contractors to aid in auditing tax returns related to virtual assets.
The IRS has not further clarified its 2019 crypto tax guidelines except to see that U.S. citizens are required to disclose their cryptocurrency holdings including any gains or losses.
Global Tax Uncertainty
The U.S. is not the only country still developing their taxation laws around cryptocurrencies. Earlier this week, South Korea’s finance minister confirmed they will impose a cryptocurrency tax in the near future. He also said the government was conducting international discussions around a new digital tax structure.
Even The IRS Admits Some Crypto Tax Regulations Are ‘Not Ideal’
Roughly four hours into a phone call with a TurboTax representative, during which she had to sort through the company’s own internal resources to answer my questions, I found out I probably didn’t owe any taxes on my admittedly meager bitcoin holdings. It should have been obvious: At no point did I sell for fiat or convert into another crypto.
In reporting this article, I was also reminded I should check my Blockchain account to see if I ever received the XLM it was airdropping because that might also result in me owing taxes on crypto (I did not). Do I need to report the $15 in bitcoin I sent to a hardware wallet I can’t access anymore? (I don’t think so.)
U.S. taxpayers have until Wednesday to file their 2019 returns if they haven’t already, or to otherwise request an extension. I’ve been covering taxes around the crypto space for most of the past year and have talked to more than half a dozen certified public accountants, tax lawyers and other professionals about what the Internal Revenue Service’s (IRS) issued crypto tax guidances are actually telling us. If a reporter who’s been embedded in the space is having this much trouble, imagine how hard it might be for a complete newcomer.
This is going to remain one of the biggest barriers to mainstream adoption.
Even the IRS admits the guidance leaves questions unanswered. An IRS official said taxpayers should take advantage of both the forms that exchanges are issuing to list taxable events and the different software tools that have been built to help simplify the process.
The official, who did not have authorization to speak publicly, acknowledged that some of the guidance published to date could be clarified and “is not ideal,” saying the agency is working to keep up with the crypto industry.
One of the major outstanding questions falls around information reporting, said Michael Meisler, a partner at Ernst and Young (EY) who specializes in taxes and is the Big Four auditor’s global blockchain tax leader.
Taxpayers can use different methods to report how much they believe they owe, but they should be consistent when calculating gains and losses. Using weighted averages, for example, might be impermissible under existing guidance and the FAQs (which Meisler noted is not “published guidance” in the legal sense).
The IRS official agreed, telling CoinDesk this is the next issue on its list around crypto.
“The IRS is working on guidance about how to get proper information reporting and what is the proper form of information reporting, and the IRS has recognized that that guidance is lacking as far as what the exchanges should report on,” the official said.
“We’re working on that as part of our guidance plan and that is really probably the top most guidance priority for the IRS, in, in the realm of virtual currency at this time.”
Another unanswered question around crypto taxes revolves around staking, said Shehan Chandrasekara of CoinTracker, a crypto tax service.
He pointed to Ethereum’s pending upgrade to Eth 2.0, which will see the second-largest cryptocurrency’s consensus mechanism switch from proof-of-work (where computers maintain the network by running complex calculations and issuing blocks with crypto in them as a reward for miners) to proof-of-stake (where computers maintain the network by locking in large amount of wealth from validators that earn annualized interest as new blocks are issued).
“There’s a lot of people making passive income through staking,” he said.
It gets weirder with decentralized finance (DeFi). While centralized exchanges are publishing 1099 forms and sending both the IRS and taxpayers information about their transactions, decentralized platforms might not be.
“DeFi platforms aren’t issuing tax forms,” Lodha said.
Margin trading is another issue where unsophisticated users are ending up with leveraged positions, since crypto derivatives settled in crypto essentially mean the taxpayer is receiving property at the end of the transaction.
“There’s pretty clear guidance on non-crypto futures, like if you’re trading regulated commodity futures that are [U.S. Commodity Futures Trading Commission] regulated, there’s like a ton of legislation around how that works,” he said.
Crypto futures fall into a fuzzier category, particularly as unsophisticated traders (like some Robinhood users) might end up with highly leveraged positions without understanding the tax implications, he said.
The way IRS guidance on airdrops and hard forks is currently worded may be unclear, the official added.
At present, the biggest issue the IRS has is a resource one, given how quickly the industry changes and the other issues facing the agency today, including the response to COVID-19.
“[The] industry changes so quickly that to try and keep up with the industry and make the guidance relevant [is challenging]. At the same time the IRS has been facing other legislations with regard to the Taxpayer First Act and then some of the legislation with respect to COVID,” the official said. “The biggest challenge is just kind of resource, and facing the other legislative priorities that have been coming out.”
Still, the IRS has published multiple pieces of guidance and its FAQs, which shed some light on what taxpayers might owe and how they should calculate those costs.
Filing Your Taxes
What the IRS has made clear is taxpayers need to file if they made (or lost) any money as a result of exchanging their crypto for fiat or another cryptocurrency; if they gained any crypto as a result of airdrops or hard forks; or if they gained funds as a result of staking or mining.
The IRS added a mandatory question to the U.S. tax return last year, asking if the individual held or transacted with crypto during the year.
“That question proves intent, so if you lie to that and then the IRS finds out through [a] 1099 that exchanges issue or through scanning the blockchain … then all of a sudden it can turn criminal,” said Austin Woodward at crypto tax startup TaxBit. “It is important to take that question seriously and answer it honestly.”
The IRS is cracking down on crypto taxes this year in a way the agency hasn’t in past years, said Chandan Lodha of CoinTracker.
He pointed to the 1040 form, last year’s updated guidance and the 10,000 warning letters the IRS sent to taxpayers last year. IRS job postings also seem to indicate the agency is “doubling down on hiring consultants” to track transactions and de-anonymize transactions.
If taxpayers don’t have the necessary information to fully file their taxes, they should file for an extension, said CoinTracker’s Chandrasekara. Lodha added that doing so is “super trivial,” with no downside.
Chandrasekara noted the extension only allows taxpayers to file their forms later, but any payments they owe are still due on July 15.
Just by filing an extension, taxpayers might avoid having to pay a penalty for being late on their paperwork, he said. Still, they might owe some penalties for paying late (which is better than not filing at all and potentially being audited).
“My recommendation is if somebody doesn’t have all the information to figure out their tax liability, just be more conservative,” he said. If a filer says they made more on crypto than they actually did, they’ll get whatever excess they paid back.
The IRS takes enforcement more seriously than comparable agencies in most other countries, Woodward said, similar to the Australian Tax Office.
The agency mailed some 10,000 letters to taxpayers in 2019, asking them to verify their crypto transactions and offering hints at how to calculate their fair holdings’ fair market value. A second set of letters warned taxpayers they may have incorrectly reported their holdings, and detailing what the agency believed to be the correct amount owed.
“I think right now [the IRS’ taxation treatment] falls in line pretty closely with that of equities so it’s nothing new. It’s been around for you know decades now,” Woodward said. “It’s just cumbersome in the crypto space as opposed to the equity space because there’s so much more transaction volume.”
The IRS is definitely taking the space seriously though, he said, a sentiment Lodha echoed.
There’s “significant evidence” the IRS cares, including through its recent postings seeking expertise around crypto transactions, Lodha said.
The IRS official CoinDesk spoke to recommended using the different software tools that have been released.
“Taxpayers should at least use the information that their exchanges provide and reflect that on their returns, and there are tools out there that they can use that interact with these exchanges that [conduct] the process now kind of seamless in the realm of someone who’s engaging in cryptocurrency transactions,” they said.
It’s important to be careful when using different software products as well, Meisler warned. Different software solutions running the same data might calculate different gains/losses due to how they interpret guidance. This could happen if one solution calculates fees different from another, for example.
The taxpayer would still be responsible for accurately reporting their holdings to the agency, he said.
“If the guidance is lacking, the taxpayer should use their best efforts and then take consistent positions from their reporting,” the IRS official said.
Crypto Taxes: Still Confused After All These Years
Kirk Phillips is an entrepreneur, certified public accountant (CPA) and author of “The Ultimate Bitcoin Business Guide: For Entrepreneurs & Business Advisors.”
You need to be nimble to be a crypto tax professional. As the industry has evolved over the last few years, there have been many technology changes, and many changes in how the IRS treats crypto taxation issues.
Between 2014, when the IRS issued its first virtual currency notice, and 2019, when it published new virtual currency FAQs, we saw all kinds of innovation requiring tax rethinks. Chain-splits, airdrops, token swaps, staking, DeFi yield farming, synthetic assets and more emerged in that period.
This explains why the AICPA (which represents accountants), the American Bar Association, and Coin Center have worked feverishly behind the scenes explaining to the IRS how “virtual currency events” should be taxed. As a member of the AICPA Virtual Currency Task Force, I’ve been fortunate to participate in these conversations and get a first hand view.
Crypto and Taxes 2020: Wednesday is this year’s deadline for Americans to file their tax returns, and cryptocurrency users’ obligations are as confusing as ever. This series of articles explores the complex issues facing digital asset investors.
Even today, it’s arguable whether we have greater clarity than before. Many tax professionals claim the recent guidance didn’t provide much clarity and created more confusion than it dispelled. For example, Rev. Rul. 2019-24 describes an “airdrop after a hard fork.” However these are independent and unrelated events, so professionals find it challenging to interpret the meaning and how to apply it.
This situation isn’t unique to crypto. Sometimes the IRS publishes final regulations more than a decade after taxpayers wish they were available. But it does make for unpredictable outcomes and forces individuals and businesses to file more in hope than expectation that they’ve acted correctly.
Even in a world where all taxpayers operate in good faith and make their best compliance efforts, they might take a completely different approach to the same scenario. For example, Taxpayer A arrives at a non-taxable or tax-deferred scenario while Taxpayer B concludes they have ordinary income, yet both were engaged in the same Virtual Currency Transaction X.
Tax positions are a game of risk management taking account the likelihood of audit, the strength of the position and amount of the tax liability, penalty and interest due if a taxpayer “loses the game.”
Risk management gets more complex when tax advisors are involved because their asses are on the line. There are more professional liability claims for tax services than any other service offered by CPAs. (Audit claims are higher in dollar value but lower in number.)
With this in mind, some tax preparers are undercharging for services and many taxpayers don’t understand how tax preparer risk is properly reflected in the price. Almost anyone can prepare taxes for hire and you don’t have to be a CPA. But like Robert Kiyosaki says, “free advice is the most expensive advice,” referring to people who like to get advice from an “expert friend.”
Tax compliance and tax reporting are a collaborative dance between taxpayer and tax advisor. A taxpayer may prefer a more aggressive tax position, but both the taxpayer and tax advisor are simultaneously on the hook, albeit in different ways. Both parties have to come to and be comfortable with their consensus. Just add in crypto and the process becomes more challenging.
What we’ve seen since the IRS’s 2014 Notice makes it easy to conclude there’ll be a larger cornucopia of “virtual currency events” over the next six years for the crypto tax industry to digest. Taxpayers will continue to take varied positions, some of which will be audited as the IRS steps up compliance efforts and finds a long-term approach.
The audits that end up in tax court will set “de facto tax guidance” for the whole industry to follow. The rulings are sure to be as entertaining but it’s a long road to reveal the answers taxpayers want today. Perhaps tax courts will chime in on whether chain-split coins are ordinary income when a taxpayer exercises dominion and control, capital gains only when sold or something else.
In the meantime, the AICPA, Lukka Library and individual CPA and law firms are producing excellent resources to help navigate uncertain crypto seas. The result is a “collective knowledge base” allowing everyone to benefit. Tax clarity is ever-evolving, so get educated.
Enjoy your ride on the crypto tax rollercoaster. No face mask required.
Crypto Tax Disclosures Can Help With Internal Revenue Service
Disclosure sounds like it exposes you to extra IRS audit risk, but if it’s done properly, disclosure can actually reduce your risk.
Crypto and taxes hardly go together like cream and sugar. Yet every crypto investor or business these days faces them. For many, starting with the United States Internal Revenue Service’s launch of the “it’s property, not currency” mantra in 2014, it has been six long years of trying to comply. However, there are plenty of useful tools available that may help with the process. But make no mistake, there are still many unanswered questions that can make doing your taxes a nightmare.
Even most noncrypto taxpayers think of taxes as complex, and they are not wrong. But when it comes to crypto, the tax rules can seem overwhelming. Yes, the IRS has released a few dribs and drabs of guidance. Though much of it has been in informal FAQs, such as those issued in 2019, but are they reliable? The Government Accountability Office points out in its Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance report that this guidance is not binding. So, as a technical matter, you can’t even rely on it.
Of course, now the IRS includes crypto tax questions on every Form 1040, so be careful how you answer.
In the perfect storm that crypto taxes have become, you still have to do your best, and you still have to sign tax returns under penalties of perjury. But you want to protect yourself, too. Tax advisers use the term “disclosure” frequently. It can sometimes have a negative connotation, and without knowing exactly why, many people do not want to “disclose” unless they must.
After all, discretion and privacy sound so much better. You may not know what disclosure really means or why you may want to do it. It just sounds like extra work, or extra risk — something you do not want to consider unless it is required somehow. No one wants a tax audit. We all fear IRS audits, and we all want to steer clear of them; extra audit attention is the last thing anyone wants. Ironically, though, disclosure can actually reduce risk in some cases.
What is disclosure anyway? Disclosure is more than the usual listing of income or expenses. It is simply a type of extra explanation. How much extra explanation a disclosure involves varies considerably, not only in legal requirements but also in practice. Sometimes the IRS says it is required. The circumstances and tax issues can be extremely varied.
Some of it is about how strong or weak your tax position is on your facts and under the law. The IRS wants disclosure if you do not have at least “substantial authority” for your tax position. If you claim it and you want to avoid penalties if the IRS disallows it, you must disclose it. You do so because your position is weak, and you have indicated to the IRS that you are claiming it nonetheless.
I’m sure that sounds like you are asking for the IRS to audit you or to disallow the deduction. But it is often surprising that huge numbers of disclosures actually do not trigger audits. Most do not, and in that sense, the fear that disclosing enhances audit risk is often overblown.
Technically, you do not have to disclose. But disclosing has a big silver lining: It is a way to get out of penalties. What’s more, it can also prevent the IRS from extending the usual three-year limitations period for an assessment of income tax. For example, if you omit more than 25% of the gross income from your tax return, the normal IRS three-year statute of limitations is extended to six years.
However, in determining whether you omitted income from your return, the IRS counts what you disclosed, too, even if you say it isn’t taxable. So, you help yourself by disclosing. However, there is also a penalty for a substantial understatement of income tax. It is notable that the threshold is not high. Individuals who understate their taxes by more than 10% or $5,000, whichever is greater, can end up with this penalty. One way to avoid the penalty is to adequately disclose the item.
All you need is disclosure plus a reasonable basis for your tax position. Once again, disclosure helps you. How do you disclose a tax position, for example, to be sure you aren’t hit with a substantial understatement penalty? The classic way, which the IRS clearly prefers, is by form. There are two disclosure forms, Form 8275 and Form 8275-R. We can dispense with Form 8275-R because that form is for positions that contradict the law.
If you need to file a Form 8275-R, get some professional advice, possibly from more than one source. In fact, these forms are exceedingly rare, and you generally should think long and hard about any tax position that merits one of these R forms. Form 8275 (without the R) is another matter. This is a very common form, and it is often filed.
It bears underscoring that most tax returns attaching Form 8275 are not audited, and the form does not automatically trigger an audit. But how much detail to provide is another matter. In the hundreds of these forms I have been asked to review, rarely have I not cut down what the taxpayer or tax return preparer is proposing to say. To put it differently, taxpayers and tax preparers alike, in my experience, tend to go overboard in my opinion.
In fact, some people go on for pages on Form 8275 and even include attachments with letters or documents. That is inappropriate and exposes you to additional risk. Besides, the IRS doesn’t want or need all of that. Some proposed Forms 8275 are long-winded arguments about the law, sometimes all in capital letters, citing many legal authorities.
That is not appropriate material for a disclosure, nor are attachments. I have even seen proposed Forms 8275 that attach full legal agreements or excerpts. Do not do this. If the IRS wants your legal settlement agreement or purchase contract, the IRS will ask for it. In short, going overboard in a disclosure is usually unwise. You are required to disclose enough detail to tell the IRS what you are doing. Don’t hide the ball, but keep it short and thorough.
IRS Tax Warnings On Ethereum’s Fifth Anniversary
Since the time Ethereum was born, the crypto-tax landscape has dramatically changed, and that is where we are now.
As important as Ethereum has become, even eclipsing Bitcoin (BTC) in some circles, it is no wonder that its fifth birthday has prompted comments — some prophetic, others nostalgic. Few, however, will mark the occasion by thinking about taxes, but that could be shortsighted.
The last five years have seen near-tectonic shifts in how investors, exchanges and government agencies see cryptocurrencies.
The Internal Revenue Service, or IRS, is at the top of the heap when it comes to tax enforcement. This is plainly true in the United States, and it is increasingly true worldwide, too. In 2008, the IRS and Department of Justice broke the back of Swiss banking. Over 50,000 Americans rushed to disclose their offshore accounts, paying billions in taxes and penalties while the U.S. secured numerous criminal convictions and huge fines from Swiss and other foreign banks.
With America’s unique Foreign Account Tax Compliance Act, or FATCA, banks worldwide now routinely report account holders with an American connection to the IRS. The power of the IRS and the U.S. Department of Justice is clearly relevant to crypto, which is arguably the offshore banking of the modern era. The IRS would like to emulate its wildly successful offshore banking haul with crypto. A lot has changed in the five long years since Ethereum was born. Let’s take a look.
IRS Forms For Crypto Taxes
In 2015, not many people were reporting crypto transactions, according to the IRS. Now, there is practically an onslaught of IRS forms.
Normally, these not-so-fun little tax declaration forms arrive around the end of January for reporting income paid to you or transactions made in the previous calendar tax year. Employees paid in crypto? The IRS says that wages paid to employees using virtual currency are taxable, must be reported on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
Payments using virtual currency made to independent contractors are taxable to them, and payers engaged in business must issue Form 1099.
A payment made using virtual currency is subject to Form 1099 reporting just like any other payment made in property. That means if a person in business pays crypto worth $600 or more to an independent contractor for services, a Form 1099 is required.
If you receive Form 1099, keep track of them. Each one gets reported to the IRS (and state tax authorities). If you don’t report or otherwise address the reported income on your tax return, you can expect that the IRS will follow up.
IRS Information Access
This is a big one. In 2015, it was widely assumed that the IRS was struggling to make any headway with crypto. Almost no one was issuing tax forms, and many crypto investors evidently just weren’t reporting — so said the IRS reported statistics. The year 2020 is completely different. Now, the IRS is using software to track crypto.
The IRS also got access to Coinbase account holder records in the Coinbase John Doe Summons litigation that started in 2016. It is widely assumed that we will see more efforts of that sort for any exchanges that are not issuing plenty of IRS information returns. Remember, the IRS broke the back of Swiss banking with a Joe Doe Summons.
In 2015, there was little attention paid to this topic, and there were few systems and vendors for keeping track of trades and activity.
It was generally recognized that you needed to have access to trading data to report your taxes, but the details were scarce, and some assumed that repercussions might not be bad. Today, everyone knows what a stickler the IRS can be, and everyone knows that the IRS cares about crypto. Witness the crypto question that now appears on every U.S. tax return. The IRS is really watching now.
Yes, that applies to crypto investors too. You’d better have some if you are thinking about taxes. If you’ve ever tried to tell the IRS “I lost my receipt,” you don’t want to do it a second time. The IRS has heard every excuse in the book. While it is not without sympathy, you’ll find it far easier not having to go to the additional effort of proving something by another means.
Everything Triggers Taxes
In 2015, we already knew that the IRS says crypto is property. That announcement came in 2014, but there were no details. There have been some since, and the IRS looks to collect taxes at just about every transaction. In 2015, it was generally assumed that you could trade one crypto for another under section 1031 of the tax code. With no fiat, there was nothing to tax, the argument was.
But in 2018, the law was changed to say “No deal,” making even crypto-to-crypto trades taxable as sales. So for any transaction, while there is a lot more than taxes involved in decisions, it can be wise to always include taxes on your list.
What Crypto Did You Sell?
In 2015, such topics as inventory systems and specific identification were being discussed, but these topics are vastly more important today. If you have 100 Bitcoin and you sell 10, which 10 did you sell? There is no perfect answer to this question. Most of the tax law considers shares of stock, not cryptocurrency.
Specific identification of what you are selling, when you bought it, and for what purchase price is likely to be the cleanest. But that may not be possible. Some people use an averaging convention, where you essentially average your cost across a number of purchases. Consistency and record-keeping are important.
Gifts, Holding For Others
Gifts of crypto were in their infancy in 2015. Some people struggled with how to do it, how to report it and more. But what if the recipient then sells it? In 2020, this is far more common, and estate planners are mentioning it more and more. Charitable contribution counts too. Crypto is being featured in estate tax planning and estate tax audits too.
Holding crypto for others is not a gift, so why mention it? Various escrow and trust arrangements — some informal, some not — have blossomed. They can be sensitive, particularly now with the IRS’s much greater access to information. Be careful who is selling and how such activities are reported.
Audits involving crypto were in their infancy in 2015, but have now ramped up bigtime. The IRS has crypto training now for its auditors and criminal investigation division agents. Should the latter scare you? I think so. The IRS and Department of Justice still bring criminal charges primarily involving crypto use for illegal purposes involving other crimes. Say, money laundering or child pornography.
But that is no guarantee. Besides, most criminal tax cases historically come out of regular old civil IRS audits. The IRS auditor sees something he or she thinks is fishy, and invites the criminal people at the IRS to take a look. It’s called a referral, and you don’t know if it is happening. In fact, you usually don’t know until it is too late.
IRS Plans To Ask Every American Worker If They Used Crypto In 2020
Every American filing taxes for 2020 will have to tell the IRS whether they used crypto this year, according to new drafts from the tax agency.
On Aug. 19, the IRS released drafts of its income tax forms for 2020, which will ask every American filing income for the year whether or not they used crypto.
Early into its very first page, the latest 1040 form asks: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Chandan Lodha, founder of crypto tax software firm Cointracker, told Cointelegraph:
“The cryptocurrency question is now front and center on the IRS Form 1040 for next year. Pretty clearly shows that the IRS is taking cryptocurrency taxes even more seriously.”
The news follows a series of other indicators that the tax agency is stepping up its work to bring crypto to heel.
The Challenge of Taxing Proof-of-Stake
Cointelegraph examines the basis of Congress calling out the IRS for threatening to tax proof-of-stake rewards beyond their actual value.
While being a relatively young correction to energy-intensive proof-of-work (PoW) network validation, proof-of-stake has existed in theory since 2012. However, rising market cap of PoS tokens like Cardano (ADA) and Tezos (XTZ) over the past two years and Ethereum’s much-hyped but much-delayed shift from PoW to PoS have brought the subject to the forefront.
Alongside an overall increase in regulatory attention on crypto generally, PoS protocols are an area of much debate. One question highlighted by a recent letter from several Congresspeople to the IRS is taxes. Specifically, the letter voiced worries about overtaxing staking rewards.
Unfortunately, the IRS is really treading in new territory, so it’s not a surprise that they have yet to put together comprehensive guidance on staking rewards. Congressman David Schweikert (R-AZ), whose office sent the letter to the IRS, told Cointelegraph that the main task was “just trying to get it on their radar.” He continued:
“We know they have some very smart people over there working on those issues. We’re letting them know that there are those in Congress interested.”
As Cointelegraph has noted in the past, educating the IRS is complicated. Staking is no exception.
Staking Rewards And The Question Of Earnings
Explained briefly, PoS replaces PoW’s dependence on hardware with commitment to the network. A Bitcoin miner in 2020 needs to buy fleets of ASIC machines and scour the globe for cheap electricity sources to have a real chance at turning a profit in the cryptographic arms race. PoS puts forward a more utopian vision of contributors validating the network by demonstrating their continued investment in it.
Obviously, the PoW v. PoS debate is more complicated than that. Issues like 51% attacks or domination of PoS networks by the earliest pioneers come up. Nonetheless, as a means of running a network it’s a vital and evolving technology. When it comes to taxes, however, it’s mostly unmapped territory.
The argument that the recent letter to the IRS depends on is this: If you stake tokens most networks reward you with tokens. Tax authorities like the IRS might be tempted to regard these rewards as income, as if those rewards were returns on a stock investment.
That, however, assumes a lot about the stability of token prices on a PoS network, especially given that staking itself limits liquidity, so the staker is not able to respond to short-term price movements.
PoSA And Defense Of Staking In The Face Of Dilution
The Proof of Stake Alliance (POSA) is an advocacy group that focuses on issues most pressing to PoS networks. The POSA also helped with the letter to the IRS. Evan Weiss is the founder of POSA, in addition to being Bison Trails’ head of business operations. Speaking to Cointelegraph, Weiss commented on the distinction between mining and staking:
“With mining, token ownership and security of the network are divorced, but in proof-of-stake networks token holders have to help secure these networks. And so these rewards affect nearly every token holder now. It is such a tax headache.”
Providing the intellectual framework to the POSA’s work is Abraham Sutherland, an adjunct law professor at the University of Virginia. In a paper published this week in Tax Notes, Sutherland and co-author Mattia Landoni of the Federal Reserve Bank of Boston wrote of the dangers of dilution. They argue that staking increases tokens but not the network’s overall value:
“Cryptocurrencies consist of several tokens (units of accounting) in a network. If one accepts the uncontroversial premise that the value of a cryptocurrency network does not depend on the exact number of tokens it contains, then the creation of new cryptocurrency units results in dilution. Unlike random fluctuations in network value, which can give rise to both capital gains and losses, this dilution is sure to happen and sure to be detrimental to the taxpayer’s wealth.”
Speaking With Cointelegraph, Sutherland Explained The Misconception Of Profiting From Staking Further:
“The simple model is what if everybody stakes their tokens? Then you basically have the same thing as a pro-rata stock dividend or even just a stock split, which, of course, is not taxed because there’s no gain there.”
Refining And Expanding Definitions
Sutherland took issue with the IRS’s implication of protocols that back tokens in the profit or lack thereof of stakeholders:
“There’s kind of an assumption supported by the way the IRS looked at this in 2014 that these protocols are entities capable of making payments to people, but they’re not. For tax purposes, they’re not corporations and they’re not doing anything as an actor in the traditional sense.”
The question of protocols as legal entities relates to the ongoing debate over which tokens qualify as securities i.e. investments in a company. Without clear policy from the IRS, taxpayers concerned about stringent crackdowns are left treating returns from decentralized protocols like those from the stock market.
Rather than the stock market, some people say the best analogy for staking is produce. If you have an apple tree on your property, the IRS can’t tax you for apples growing on it, nor can they demand a slice out of every apple pie you make for personal consumption.
They can, however, tax you if you bring your apples to market to sell. That seems to be POSA’s point as well: The moment of sale for another currency is a clear and convenient taxable event for tokens earned through staking.
Chandan Lodha, a co-founder of crypto tax software Cointracker, told Cointelegraph that existing guidance just doesn’t include the range of active cryptocurrencies, meaning that regulators are stuck trying to apply creaky analogies, like those of apples or stocks. He said:
“As the industry matures, we need more specific guidance on how different emerging areas of cryptocurrency are taxed (e.g. staking) and legislation more explicitly defining how these taxes should work on cryptocurrencies — either by creating a new definition of what cryptocurrencies are, or by having more specific rules based on the type / use case of the cryptocurrency.”
Shehan Chandrasekera, Cointracker’s head of tax strategy, advised caution in the meantime: “In the absence of IRS guidance, what taxpayers can do is take the most conservative approach, which is recognizing income at the time you receive it.”
Nonetheless, it’s clear that the IRS is paying ever-closer attention to crypto. Spurred on by legislators, something’s got to give.
IRS doubles Down, Investing Another Quarter Million Dollars Into Tracking Crypto Transactions
A new analytics firm scores a major contract with the U.S. tax agency, which has been upping its crypto engagement left and right.
On Sept. 8, the IRS’s criminal investigation department signed a $249,900 contract with a blockchain analytics firm to expand its crypto tracing tools.
The contract provides limited information, but it follows an overarching trend of the IRS stepping up its game when it comes to crypto.
The firm behind the contract, Blockchain Analytics and Tax Software, is a relative unknown compared to familiar faces in analytics like Chainalysis. The firm’s only prior government contract was for only $9,800 with the U.S. Treasury for serving as an expert witness.
Just last week the IRS put out a request for submissions for a pilot program to track cryptocurrency transactions. A staff member at the IRS confirmed to Cointelegraph that this new contract is not a response to that request.
Blockchain Analytics and Tax Software had not responded to Cointelegraph’s request for comment as of press time.
IRS investigative capabilities played a major role in a massive seizure of crypto bound for terrorist networks last month.
Meanwhile, for more civilian purposes, this year’s tax forms in the U.S. will put the question of whether a taxpayer used crypto in 2020 front and center.
The IRS Offers A $625,000 Bounty To Anyone Who Can Break Monero And Lightning
The United States Internal Revenue Service has announced a bounty of up to $625,000 to anyone who can crack Monero’s privacy.
The United States Internal Revenue Service has offered a bounty of up to $625,000 to anyone who can break purportedly untraceable privacy coins such as Monero (XMR) as well as trace transactions on Bitcoin’s (BTC) Lightning Network.
The official proposal, published last week, says the IRS will accept submissions in the form of working prototypes until Sept. 16. If accepted, applicants will receive an initial payment of $500,000.
This grant will allow applicants to develop their prototype into a working concept over the next eight months. Once the pilot test is completed and approved by the government, a further $125,000 grant will be awarded.
“IRS-CI is seeking a solution with one or more contractors to provide innovative solutions for tracing and attribution of privacy coins, such as expert tools, data, source code, algorithms, and software development services.”
The announcement defines the initiative’s primary objectives as helping IRS Criminal Investigation, or CI, special agents to trace transactions — including identifying wallets, transaction dates and times — and amounts transferred. The agency hopes to use the tools to predict the future transactions of flagged addresses.
The final products must also provide CI full control, with the ability to further develop or modify them so that the organization does not have to rely on any external vendors.
Monero is one of the virtual currencies preferred among criminal organizations over more traceable crypto assets like Bitcoin. The IRS noted that XMR is being used for all future ransom demands and transactions by ransomware group Sodinokibi due to its “privacy concerns.”
Demand for privacy coins among criminal syndicates has grown as authorities have increased their crypto forensics capabilities and employ the skills of private contractors such as Chainalysis. In recent years, Chainalysis has assisted law enforcement in tracking Bitcoin and other cryptocurrency transactions to successfully fight child abuse, money laundering and terrorist financing. Last month, Chainalysis was integral in the takedown of three terrorist organizations.
Privacy coins are a key strategy to help criminals obfuscate their transactions, with the IRS stating:
“Currently, there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero or other off-chain transactions that provide privacy to illicit actors.”
Blockchain analytics firm CipherTrace claims to have a new tool that can trace Monero transactions, although its capabilities are yet to be confirmed. The company announced that the tool, which took more than a year to develop, will be used by the U.S. Department of Homeland Security. CipherTrace chief financial analyst John Jeffries said the tool can track stolen Monero used for illegal transactions back to the source, such as in ransomware cases.
The IRS Sets A Trap For Cryptocurrency Tax Cheats
The tax collector is making it a lot harder to pretend you don’t have bitcoin or other virtual currencies hidden away somewhere.
Cryptocurrency holders, beware: A surprising change to your 2020 tax form is about to strip away excuses for ignoring the tax rules on bitcoin, ether or other digital currencies.
The Internal Revenue Service plans to alter the standard 1040 form by putting this question on the front page: At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? The taxpayer must check the box “Yes” or “No.”
The crypto question first appeared on the 2019 tax form, but on a part of the return that not all filers had to answer. Now it’s moving to the 1040’s most prominent spot, just below the taxpayer’s name and address.
The IRS’s move is a strong warning to millions of crypto holders who aren’t complying with the law that they must file required forms they may see as burdensome and pay taxes they may think are unfair. It has impressed tax specialists.
“This placement is unprecedented and will make it easier for the IRS to win cases against taxpayers who check ‘No’ when they should check ‘Yes,’” says Ed Zollars, a CPA with Kaplan Financial Education who updates tax professionals on legal developments.
Mr. Zollars notes that U.S. tax authorities have already succeeded with a similar strategy: A simple tax-return question about offshore financial accounts greatly aided their crackdown on Americans hiding money abroad. Since 2009, it has brought in more than $12 billion from individuals.
By changing the position of the crypto question and having all 1040 filers respond to it, the IRS is making it much harder to claim ignorance of the rules. Lying on a tax return is a bad idea because filers sign returns under penalty of perjury, and juries often side with the IRS when it’s clear a taxpayer has lied.
The change to the crypto question and other recent actions show the IRS is taking cryptocurrencies seriously as a threat to the tax system, whether the noncompliance is by enthusiasts who owe little or by sophisticated international criminals. In two recent nontax criminal cases—one involving theft by North Korea and the other involving the sale of child pornography by a Dutch national—the IRS has provided key assistance because of its growing expertise in cryptocurrencies.
The agency is right to be worried about noncompliance, say specialists. Coinbase, a leading cryptocurrency exchange and custodian, said it had 35 million total accounts as of July. Chainalysis, a firm that provides crypto investigations software, estimates there were at least 3.1 million active accounts using the popular bitcoin currency in the U.S. between June 2019 and July 2020.
The IRS won’t say how many taxpayers have checked the crypto box for 2019. But Dan Hannum, chief operating officer of ZenLedger, a crypto tax-prep software firm, thinks a total of fewer than 150,000 crypto owners filed required tax forms for 2017, 2018, and 2019, based on his industry knowledge.
For their part, many crypto users are angry with the IRS’s guidance, which treats bitcoin, ether and their kin as property rather than currency. So if a crypto holder uses it to buy something or exchanges one cryptocurrency for another, there’s usually a capital gain or loss to report on the tax return.
“Buying a sandwich with cryptocurrency shouldn’t be a taxable event,” says Sean Cover, a New York City cryptocurrency holder who works in finance for a nonprofit group. He says that in 2017 he had more than 500 transactions on several platforms, and it took him 10 hours to prepare his crypto tax forms even though he paid for special software.
Like some members of Congress, Mr. Cover supports a $200 threshold before crypto transactions would need to be reported. The IRS says it’s up to Congress to change the law.
Tax professionals also have concerns. Earlier this year, the American Institute of CPAs sent the IRS officials a 28-page letter taking issue with its guidance that said the crypto received from reorganizations called forks and marketing giveaways called airdrops can be taxable to recipients. It asked for other clarifications as well, such as for reporting offshore holdings of cryptocurrencies.
Meanwhile, the IRS is forging ahead with other crypto compliance measures. Earlier this month, it offered rewards up to $625,000 to code-breakers who can crack so-called privacy coins like Monero that attract illicit activity because they claim to be untraceable.
In late August, the agency released guidance affirming that taxpayers who receive crypto for completing “microtasks” must declare it as income. This applies to users of firms like StormX, which makes tiny payments in crypto to people who do small tasks such as playing games, answering surveys, or evaluating products.
Tax Payers Needn’t Disclose Merely Holding Crypto: IRS Draft 2020 Guidance
The U.S. tax agency has clarified who needs to answer “yes” to a question over cryptocurrency activity included in the draft 1040 federal income tax form.
As reported in September, the Internal Revenue Service (IRS) revealed it would reposition a question on the 1040 form for 2020 that will require returnees to indicate if they “acquire[d] any financial interest in any virtual currency” over the tax year.
In its recently published set of draft instructions, the IRS now explains that tax payers would need to answer in the affirmative if they sold any cryptocurrency, exchanged cryptocurrency for goods or services, or exchanged cryptocurrency for property including other crypto assets.
It also sets out that respondents must answer “yes” if they received any cryptocurrency for free, including via airdrops or hard forks.
Airdrops are free distributions of cryptocurrency to users or potential users, often in a bid to kick off adoption of a new coin.
Hard forks, updates to a blockchain’s code that require users to update to the new version, sometimes arise in the division of a chain into two competing but similar networks, each with its own cryptocurrency.
When such a fork occurs, holders of the original coins may also automatically receive the same number of assets on the new chain. For example, holders of 10 bitcoin automatically owned 10 bitcoin cash after a hard fork in 2017.
The IRS draft guidance also makes clear taxpayers need not check yes if they merely held cryptocurrency in 2020, or moved it from one wallet to another owned by them.
The draft is likely to stand unless there are “unexpected issues” or new legislation requiring changes, the IRS said in the document.
With the IRS’ paucity of guidelines on how to pay crypto taxes much criticized in recent years, the clarification may come as some relief to 1040 form returnees. The tax agency has been somewhat heavy-handed at times, ignoring its own watchdog’s advice when sending out “soft” warning letters broadly inquiring about unpaid or incorrectly filed crypto taxes.
Tax Professional Explains The Most Important Thing For US Crypto Holders
Tax season is confusing, especially when it comes to crypto.
Wendy Walker, solution principal at the tax compliance company Sovos, described reporting as the most important aspect of tax filing that people in the blockchain industry should know about.
“Even if you don’t owe income taxes, you still have to report details of the transactions,” Walker told Cointelegraph in an interview. “I think that’s probably one of the key things about this moving of the question to the front of the 1040” she said, referencing the IRS’ recent updates to the 1040 income tax form.
This update requires citizens to disclose whether they’ve handled crypto assets during the filing year, asking “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Checking this box is just the tip of the iceberg for those involved in crypto, however. Crypto often involves transactions, buying, selling, fees, multiple storage locations and a plethora of other information that may apply to tax filing requirements in one form or another. Given the complications involved, is taxation currently even plausible in crypto? Walker thinks so, but says the IRS also has some catching up to do.
“Although this guidance has been coming out over the last year and we’ve seen enforcement, the IRS really hasn’t understood crypto,” Walker said. The U.S. tax agency has come forward with a number of attempted clarifications and rulings around crypto taxation since 2019. Such efforts, however, have shown the entity’s lack of industry knowledge in some ways.
“While they’re doing all this enforcement, they’re also kind of learning about it at the same time unfortunately,” Walker said. She specifically mentioned tax guideline difficulties when it comes to crypto transfers between exchanges, citing a lack of related documentation. There is also something of a gray area for digital assets classified as commodities, securities, or otherwise.
U.S. regulatory authorities have made some headway on these classifications, though many crypto assets still remain ill-defined.
OECD Tax Director Says International Crypto Tax Standards Are Coming In 2021
The director of the OECD’s tax center has revealed that the organization expects to release a tax reporting standard for crypto assets by the end of next year.
Pascal Saint-Amans, the director of the OECD’s Centre for Tax Policy and Administration, has asserted that the 37-nation organization will introduce a common reporting standard, or CRS, for crypto assets in 2021.
According to Law360, Amans stated that the crypto tax standard “would be roughly equivalent to the CRS” developed by the Organisation for Economic Co-operation and Development to combat tax evasion.
The director attributed the likely development of the crypto tax CRS to a desire to introduce stronger standards surrounding crypto regulations among its member-countries:
“The timeline to deliver is probably ’21, sometime in ’21, because there is an appetite by all countries now.”
Amans’ comments come days after the European Commission launched a process to amend and extend its tax evasion laws pertinent to crypto assets. The proposal was published on Nov. 23, with the commission set to receive public feedback on the initiative until Dec. 21. The new laws are expected to be introduced during the third quarter of 2021.
Despite the action taken by the commission, Amans expects that the OECD will establish crypto tax standards before Europe, describing the policy arena as an “opportunity for the EU to align with [the OECD’s] standard.”
However, uncoordinated simultaneous development could result in the OECD and Europe establishing particular policy positions that contradict each other — threatening to create regulatory challenges for the OECD’s European members, as has been recently seen concerning the taxation of digital services.
Amans dismissed these concerns, however, asserting that any proposal from the OECD would be “complementary” to EU regulations. Speaking to Law360, a European Commissi spokesperson indicated the organization is working “in parallel” with the OECD to “avoid overlaps or inconsistencies to the extent possible.”
“At the same time the specific situation of the EU and its member states needs to be taken into account,” they added.
IRS Tax Form Question Leaves US Crypto Users Confused And Concerned
This year’s Form 1040 requires all U.S. taxpayers to answer a question about whether they traded or acquired “virtual currency” during the year.
Crypto users in the U.S. have taken to Twitter to express their confusion and frustration over the wording of a question about virtual currencies on this year’s tax return form.
On Dec. 11, the IRS published a new Form 1040 return for the 2020 tax year which needs to be filed by all U.S. taxpayers. It contains the following question:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The virtual currency question is similar to one that first appeared on the 2019 form, but has this year been placed much more prominently near the top of the form. It must be answered by everyone filing a tax return honestly under the penalty of perjury,
The question was likened to a trap by accountant Ryan Losi, the vice president of the PIASCIK tax firm. “The IRS is just gathering the data, changing the forms to expressly say you did or didn’t, and setting the trap, so in the coming years, the hammer can come down,” he told Yahoo.
The lack of explicit guidance on the definition of “virtual currency” left some crypto users perplexed. Timothy Peterson, Investment Manager from Cane Island Global Macro asked ” If you check “no” are you committing perjury since it’s not defined?”
Others wondered if their crypto-related actions were accurately described in the list of actions asked in the question. One crypto tax specialist likened the question to a ‘perjury trap’.
If you answer the virtual currency question falsely, you could be charged with perjury.
Lawyers call this a “perjury trap.”
Most feel the IRS has not provided adequate guidance for taxpayers to know how to report their crypto income, especially in light of DeFi innovations. pic.twitter.com/djzzfRUJUb
— Clinton Donnelly (@CryptoTaxFixer) December 16, 2020
Shehan Chandrasekera, Head of Tax Strategy at CoinTracker.io, told Cointelegraph there could be situations where a crypto user does not know how to provide an honest answer to the question, given the limited instruction provided thus far on the issue.
“For example, if your dependent owns cryptocurrency or you have an investment in a pass through entity that deals with cryptocurrency, we don’t know if these two situations fall under the ‘financial interest’ category or not.”
Chandrasekera notes that while the IRS hasn’t yet issued final instructions for this year’s Form 1040, there is some guidance and outside instruction available on how to provide an appropriate answer. As far as unaddressed questions are concerned, it’s a matter of waiting to see if the IRS adds additional guidance.
In November, a California tax law office issued a public release to investors warning of increased enforcement activity against Coinbase users who are not in proper compliance with tax and reporting requirements.
In 2019, the IRS sent over 10,000 letters to crypto holders; many of which were determined to owe back taxes based on the incorrect filing of related documents.
IRS To Transition From ‘Education To Enforcement,’ Says Former Division Chief
A former top investigator is warning that the IRS might be shifting crypto tax payment enforcement into high gear.
A former top investigator is warning that “a high-stakes game of chicken” between the Internal Revenue Service (IRS) and cryptocurrency holders who fail to properly report their earnings will be entering a new phase in 2021 as the tax collection agency begins to focus on pursuing “civil and, potentially, criminal penalties.”
In an article co-authored by Don Fort today, the former chief of the Internal Revenue Service’s (IRS) criminal investigation division said that while the agency until now has focused its resources on informing the public of proper reporting guidelines, it will now be turning to more stringent “enforcement.”
“The IRS has been not-so-quietly positioning itself for a smooth transition from education to enforcement in 2021 and beyond.”
The article notes that the trail starts with Coinbase, who answered a “John Doe” summons in 2018 and handed over account information on nearly 13,000 users — information which could soon lead to crackdowns. For instance, the article mentions the request the IRS made to Luxembourg-based exchange Bitstamp for information on one American user.
The focus on crypto holders is in part due to a widening “tax gap” — the rift between the total income from taxes that should be paid to the Treasury verses what it actually receives — a disconnect in which Fort and his co-author Lawrence Sannicandro believe crypto holders could be playing a major part.
“As of Dec. 10, with Bitcoin fresh off new record highs, the market capitalization of cryptocurrencies was $524 billion,” the article reads. “Assuming cryptocurrency-related tax liabilities of $25 billion and a 50% compliance rate, unreported cryptocurrency tax liabilities again account for around 3.2% of the $381 billion tax gap. Thus, it is likely that unreported taxable cryptocurrency transactions are contributing significantly to the tax gap.”
Ultimately, the article concludes that major trends — such as the addition of a question about cryptocurrency now prominently placed at the top of form 1040 — indicate that the IRS is gearing up for widespread efforts to root out underpayment.
“Even though the IRS has not yet announced many mainstream tax evasion or money laundering cases involving virtual currency, that trend should change in 2021.”
Moreover, crypto holders shouldn’t try to get cute when the tax man comes calling.
“History has shown that underestimating the government is a fool’s game.”
US Crypto Firms Invest In Tax Solutions As IRS Updates Reporting Forms
Coinbase Ventures, PayPal Ventures and Winkelvoss Capital have all invested in cryptocurrency tax automation software provider TaxBit.
United States regulators are continuing to fine-tune their tax reporting requirements for cryptocurrency users. A second draft of Form 1040 from the Internal Revenue Service for the 2020 tax season published online suggests that the agency will now require anyone who was engaged in any transaction involving cryptocurrency in 2020 will need to declare it:
“If, in 2020, you engaged in any transaction involving virtual currency, check the ‘Yes’ box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.”
The draft guidance clarifies that transactions encompass “the receipt or transfer of virtual currency for free” (e.g., via airdrops and hard forks), the exchange of virtual currency for goods or services, the purchase or sale of virtual currency, an exchange of virtual currency for other property, including for another virtual currency, and the acquisition or disposition of “a financial interest in virtual currency.”
Simply holding virtual currency in a wallet or account, or transferring it between two wallets or accounts that are controlled by the same owner, does not count as a transaction for the IRS.
Those who disposed of virtual currency that is held as a capital asset through sale, exchange or transfer will need to calculate their capital gains and losses, and report them on Schedule D of Form 1040, the IRS outlines.
Against this backdrop of intensifying focus on crypto tax reporting in the U.S, it is perhaps no surprise that big-name industry players are investing in tax solutions providers that could lighten the reporting burden for consumers and businesses alike.
TaxBit, which offers cryptocurrency tax automation software for retail users, exchanges, and merchants, has today announced new investments from PayPal Ventures, Coinbase Ventures, as well as new investment from existing backer Winklevoss Capital.
Answering “yes” to the IRS’s questions does not, notably, imply that individuals who do so are necessarily liable to pay taxes on their crypto for 2020. Cointelegraph has published recent commentary and guidance from crypto tax specialists for U.S. readers, explaining some of the main requirements and developments.
The new updated draft form does, however, notably provide more clarity as to what kinds of activities exactly count as needing to be declared. An earlier version of the form had sparked concern in the industry for its inadequate and vague formulations, with some commentators going so far as to accuse the IRS of setting a “perjury trap” and sowing confusion.
Coinbase Users Can Now Report Their Crypto Taxes Using CoinTracker
Filing 2020 taxes may be slightly less complicated for Coinbase users than it was before.
With just three months until the deadline for United States citizens to declare their crypto gains and losses to the Internal Revenue Service, Coinbase is partnering with portfolio tracking and tax calculating platform CoinTracker to make the process simpler.
According to CoinTracker, it’s an easy way for Coinbase users to report their crypto transactions and sales. Targeted at U.S. users, CoinTracker will calculate and fill out the specific forms — for example, Form 8949 and Schedule D — to declare capital gains, losses and assets on income tax returns. It can be used by individuals and accountants or as part of a tax filing software program like TurboTax.
CoinTracker co-founder Chandan Lodha said the partnership would allow for a “one-click integration” from the Coinbase taxes page, allowing users to calculate crypto gains and losses on the platform. Coinbase’s investment arm, Coinbase Ventures, has made an undisclosed investment in the platform.
Cointelegraph reported in November that the IRS was taking a stronger position against Coinbase users who fail tax reporting requirements for crypto. Though some crypto users may believe it is difficult for the government to track crypto transactions, sales, profits and otherwise, lying or omitting such information in the United States is considered tax fraud and could result in an audit, fines and imprisonment.
Last month, Coinbase announced that it had switched from issuing 1099-K forms to 1099-MISC forms as part of its legal obligation as a registered business in the U.S. to declare any crypto income for taxpayers. This move would essentially allow the crypto exchange to provide taxpayer information to the IRS for any crypto user who received more than $600 in payments in 2020.
The IRS has become more diligent in scrutinizing crypto as the industry grows. A memorandum from the federal agency released in August 2020 reveals that the U.S. government considers all crypto payments as taxable income. In December 2020, the IRS placed a question asking U.S. citizens to disclose if they had interacted with digital assets at the top of their 2020 income tax returns. One crypto tax specialist noted at the time that anyone who answered dishonestly could potentially be charged with perjury for falsifying information on a government document.
Lodha told Cointelegraph in April 2020 that CoinTracker “helps increase faith and legitimacy of the cryptocurrency industry as a whole“ because it helps regulators to see that “the vast majority of cryptocurrency use is by everyday people for completely legal transactions and people are crypto tax-compliant.”
IRS Says Buying Crypto With Fiat Does Not Trigger Tax Reporting Rules
The IRS has narrowed the breadth of its new crypto reporting question.
The U.S. Internal Revenue Service (IRS) said Tuesday it will not require crypto investors who simply bought “virtual currency with real currency” in FY2020 to report that transaction on this year’s tax returns.
Delivered on the tax collector’s crypto FAQ page, the clarification effectively exempts taxpayers who, say, bought bitcoin with dollars, to check the crypto box on their annual 1040. That new question asks: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The exemption is narrow, however. Investors who swapped one crypto for another, sold their positions or received a token airdrop will still need to check the crypto box under the latest IRS FAQ update.
Taxpayers expressed confusion over whether “otherwise acquire any financial interest” in crypto included the act of buying with fiat, said Shehan Chandrasekera, head of tax strategy for CoinTracker. Even IRS officials have told CoinDesk that some of the agency’s crypto regulations “are not ideal.”
“Quite frankly, buying cryptocurrency using [U.S. dollars] is not a taxable event. So, I don’t see any reason why taxpayers have to disclose that to the IRS by checking the box,” Chandrasekera said.
Chandrasekera said the update will likely fail to clarify reporting burdens. For starters, the IRS unveiled its crypto question with little fanfare and has rolled out this new language update largely behind the scenes.
Taxpayers who are not familiar with the FAQ page will almost certainly interpret “otherwise acquire” to include buying with fiat, he said, and thus they’ll check the box.
He also questioned the logic behind kneecapping what industry experts called a crypto tax cheat dragnet.
“From just a collection standpoint it doesn’t really make sense for the IRS to have this broad question that is, I guess, self-limiting. But then on the privacy standpoint it’s much better for the tech privacy-focused taxpayers, that they don’t have to divulge information over what is a nontaxable event,” he said.
IRS Initiates ‘Operation Hidden Treasure’ To Root Out Unreported Crypto Income
“These transactions are not anonymous,” the IRS’ national fraud counsel said. “We see you.”
The U.S. Internal Revenue Service (IRS) appears to be stepping up its enforcement capabilities with a new program dedicated to cryptocurrency tax compliance.
With “Operation Hidden Treasure,” the IRS will search for unreported crypto-related income, according to Director of the Office of Fraud Enforcement Damon Rowe.
* Speaking at a Federal Bar Association virtual tax conference, Rowe said cryptocurrency fraud will be a priority. Forbes first reported the news.
* Operation Hidden Treasure, a joint effort between the IRS’ civil office of fraud enforcement and its criminal investigation unit, will train agents to look at blockchains to root out tax evasion among cryptocurrency users. It will exist as part of the office’s emerging threats mitigation team, Forbes said.
* IRS employees are also reportedly training alongside the European Union Agency for Law Enforcement Cooperation (Europol) as part of the initiative.
Carolyn Schenck, national fraud counsel in the IRS Office of Chief Counsel, told conference-goers the agency is working with private contractors and vendors, presumably blockchain analytics firms, to develop “signatures,” or telltale signs of fraudulent activity.
* These indicators include looking at those who structure transactions just below reporting requirements (like sending a series of $10,000 transactions), using shell corporations to hide funds as well as “getting on and off the chain,” Schenck reportedly said.
* The IRS has sent conflicting messages to U.S. crypto holders several times in the past. Most recently, an updated FAQ page indicated that investors who simply bought “virtual currency with real currency” would not have to report that transaction on this year’s tax returns.
* Still, cashing out crypto or making every-day purchases is typically seen as a taxable event. Operation Hidden Treasure is designed to find, trace, and attribute such transactions to taxpayers, Schenck said.
“These transactions are not anonymous,” she said. “We see you.”
Crypto.com Launches Tool To Simplify Crypto Taxes
The tax calculator is launching in Canada, but will later see a wider rollout.
Crypto.com has launched a free service it says reduces the complexity of filing cryptocurrency tax returns.
* In a blog post Wednesday, the Hong Kong-headquartered exchange said its new tool provides “an estimation of taxable gains/losses on relevant crypto transactions,” which can be downloaded for tax filing.
* Users can import transaction records from supported exchanges and wallets via CSV files or using API synchronisation where supported.
* Initially, the service is only available in Canada, but will later be rolled out to other jurisdictions.
* For when that happens, the tool uses country-specific tax calculation formulas.
* “We worked with professional tax advisers to ensure that the calculation logic is consistent with available guidance and laws for filing crypto taxes in Canada,” said Crypto.com.
How To Be Smart About Taxes On Bitcoin
Savvy cryptocurrency investors can lower their capital-gains obligations. Heedless ones are asking for trouble.
Are you among the estimated 15% of Americans who own digital currency? If you sold or traded it last year, you’re probably sitting on big gains, and those will come with hefty tax bills.
There are smart ways to manage those obligations, and not-so-smart ones, too.
Lots of crypto investors might be tempted to hide their heads in the tax-planning sand, and it’s easy to see why. The tax issues are complex. Brokerage firms don’t do the hard work of tracking their holdings, as they typically do for owners of stocks and bonds. Guidance from the Internal Revenue Service can be confusing, too.
Still, they can’t afford to throw up their hands.
Just a few years ago, many taxpayers were simply unaware of the tax implications of trading Bitcoin or other digital currencies. In 2014, the IRS had said that crypto was considered property, like stocks, and would therefore be subject to capital-gains taxes when sold or traded.
(If investors hold anything that’s considered property for under a year, it’s taxed at ordinary income tax rates. If it’s held for longer, it generally qualifies for lower long-term capital gains tax rates.)
Now, the question is less, “Wait, I owe taxes?” and more about how to reduce the capital gains tax owed, or at least how to pay it later.
The main way now to defer crypto tax bills for 2020 is to invest in an opportunity-zone fund. A provision in the 2017 tax law allows taxpayers to defer, and even reduce, capital gains taxes if they put the proceeds from the sale of say, a stock or business, into a fund created to promote investment in an economically disadvantaged area. Investors generally have six months to move the money.
Proceeds from crypto sales qualify, too, according to Ryan Losi, an accountant in Richmond, Virginia. Those who sold crypto toward the end of last year can still cut their 2020 capital-gains tax bills by acting now.
Under the rules, they’ll be able to defer their capital gains tax until 2026, and if they hold the investment beyond that, cut their tax bill by as much as 10%.
There are also some moves taxpayers should consider before taxes are due next year. Those who are philanthropically inclined and itemize their deductions may want to donate their gains to a charity (provided the nonprofit accepts crypto, although there are third parties that can help if not).
That’s doubly advantageous because the donor both escapes the capital-gains tax and gets a deduction for the full market value of the crypto holding up to a certain percentage of income, as long as it was held for at least one year, said Nicholas Marazza, an accountant at Marcum LLP.
Taxpayers may also want to start buying digital currencies in a self-directed Individual Retirement Account. Any trading of the currencies within the account wouldn’t be subject to capital gains tax — taxes would just be triggered when the money is withdrawn. Beware of the fees though, which are typically higher than a traditional IRA.
As the end of 2021 draws near, remember an advantage that crypto owners have over stock investors: cryptocurrency doesn’t have a wash/sale rule, which bars stock investors from taking a deduction for a loss if they repurchase the same security within 30 days. That means a crypto owner can sell unrealized losses by Dec. 31, 2021, to offset some gains, and then buy the crypto back in early 2022.
And here’s what not to do: use current crypto holdings as collateral to acquire a new crypto asset. Some investors do this in part because it avoids triggering capital gains tax, since they aren’t selling or exchanging anything. But it’s a dangerous tactic because it’s banking on no market downturn. Crypto markets are way too volatile to make that a good bet.
IRS Authorized To Access Information On Circle’s Crypto Traders To Nab Tax Cheats
The Internal Revenue Services will seek information from Circle on all U.S. taxpayers who traded at least $20,000 worth of crypto between 2016 and 2020.
A U.S. federal court has granted authorization to the Internal Revenue Service, or IRS, to serve a John Doe summons to fintech firm Circle seeking all information on U.S. taxpayers who traded at least $20,000 worth of crypto assets on its platforms between 2016 and 2020.
The summons will apply to Circle Internet Financial Inc. including all “predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC.”
According to the Department of Justice’s announcement, Judge Richard Stearns concluded there is “reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.”
The document also notes the IRS “does not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business,” adding:
“The summons seeks information related to the IRS’s ‘investigation of an ascertainable group or class of persons’ that the IRS has reasonable basis to believe ‘may have failed to comply with any provision of any internal revenue laws.’”
A Circle representative told Law360: “We’re reviewing [the summons], and of course expect to work collaboratively with the IRS in responding to the court order.”
Attorney General David Hubbert of the Department of Justice’s Tax Division said: “Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer. The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners are paying their fair share of taxes.”
Circle was founded in October 2013 by Jeremy Allaire and Sean Neville, with the company launching a Bitcoin wallet the following year that later became its crypto payments application, Circle Pay. In 2018, Circle launched USD Coin in partnership with Coinbase, which is now the second-largest stablecoin by market cap.
Circle purchased the popular digital asset exchange Poloniex in 2018, but announced Poloniex would “spin out” into a new company backed by an investment group with ties to Tron’s Justin Sun the following year.
More IRS Summonses For Crypto Exchange Account Holders
The recent John Doe summons developments indicate that the IRS is seriously interested in crypto — better to report than to be audited.
The United States Internal Revenue Service has been hunting crypto vigorously for more than five years now, and the pace is getting faster. A couple of decades ago, the IRS was after offshore accounts, and that effort was among the most successful in the IRS’ history. Now, it’s crypto the IRS is after, and there’s no suggestion that the IRS intends to fail.
The IRS wants crypto tax data in a big way, from asking about crypto on each tax return to its latest Hidden Treasure initiative and more.
The collective efforts of the IRS are impressive, and it is unlikely that the IRS will stop anytime soon. They are going to court as well, going after the exchanges that have customer data. First, there was Coinbase, and now, a federal court in Massachusetts has entered an order authorizing the IRS to serve a “John Doe summons” on Circle Internet Financial Inc.
Notably, the summons effort also goes after Circle’s predecessors, subsidiaries, divisions and affiliates, including Poloniex LLC, which Circle purchased in 2018. The pattern is similar to what occurred with Coinbase. The IRS’ goal is to obtain information about U.S. taxpayers who managed at least $20,000 worth of transactions in cryptocurrency between 2016 and 2020. IRS Commissioner Chuck Rettig said:
“The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions.”
U.S. District Court Judge Richard Stearns seems to agree with the IRS and Justice Department that taxpayers could be hiding taxable income from the IRS using crypto.
He found that “There is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.” There may well be more litigation, but for now, the judge’s order grants the IRS permission to serve a John Doe summons on Circle.
According to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has a reasonable basis to believe “may have failed to comply with any provision of any internal revenue laws.”
This isn’t the IRS’s first John Doe summons, or even the first one for crypto. The IRS summons efforts for crypto customer data started with Coinbase, leading to a federal court in California entering an order authorizing the IRS to serve a John Doe summons on Coinbase Inc. Apart from Circle, another IRS summons dispute is now underway in California with Kraken (Payward Ventures Inc).
The scope of the Kraken summons request is similar. That is, it is seeking information on users who reached $20,000 in transactions from 2016 to 2020. The court has already responded, saying the government’s request is “overbroad” and that it will have to refile the request with a narrowed scope. But if history is any guide, the IRS may end up getting some information.
Just look what happened with Coinbase, where court battles over the summons ended up compromised. Coinbase litigated the case for a while, but Coinbase and the government eventually reached a deal for a more limited class of information that Coinbase would’ve had to turn over.
The IRS, John Doe Summons And Privacy
Any summons from the IRS should be taken seriously. However, a John Doe summons might seem more like a fishing expedition that could easily be seen as overbroad. With a normal summons, the IRS seeks information about a specific taxpayer, a person whose identity the IRS knows. In contrast, a John Doe summons is about getting names and details of people from only a description. It allows the IRS to get the names of all taxpayers in a certain group.
A John Doe summons is ideal for pursuing account holders at a financial institution. Notably, it was a John Doe summons that literally blew the lid off the hushed world of Swiss banking in 2008. That was when a judge allowed the IRS to issue a John Doe summons to the Union Bank of Switzerland, or UBS, for information about U.S. taxpayers using Swiss accounts.
Swiss law prohibits banks from revealing the identity of account holders, but the rest is history. More than a few observers have noted that the IRS launched its over $50 billion offshore sweep with that summons. The IRS tells its own examiners to use a John Doe summons only after trying other routes. According to the IRS Manual, “It may be possible to obtain taxpayer identities without using a John Doe summons, but success can breed success.”
After sniffing out American taxpayers with UBS accounts, the IRS did the same with HSBC in India and Citibank and Bank of America in Belize. And while it will take the IRS time to collate and process any information it is able to get, you can bet that the IRS will put the information it acquires to good use. Remember, digital currency is an ongoing focus area for an IRS criminal investigation.
The IRS And Cryptocurrency
Just in 2018, the IRS announced a digital currency compliance campaign to address tax noncompliance, related to the use of digital currency, through outreach and examinations of taxpayers. The IRS says it will remain actively engaged in addressing noncompliance-related and digital currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations. For some time now, the IRS has also been hunting user identities with software.
It has been a long seven years since the IRS announced in Notice 2014-21 that digital currency is property for federal tax purposes. That early notice provides guidance on how general federal tax principles apply to digital currency transactions. Taxpayers who do not properly report the income tax of digital currency transactions are, when appropriate, liable for tax, penalties and interest. And in some cases, taxpayers could be subject to criminal prosecution.
As with the 10,000 warning letters the IRS issued to crypto holders some time ago, these recent John Doe summons developments should be a wake-up call, even for people who’ve never dealt with any of these exchanges. If you are not trying to report taxes the way the IRS wants, not using one of these targeted exchanges does not mean you are in the clear.
Besides, basic reporting isn’t that hard. Amending tax returns to ask for big tax refunds is a well-known audit trigger, but amending to report extra income and pay extra tax is usually much less so.
Moreover, it can head off much bigger problems. When amending returns, be careful. All returns must be signed under penalties of perjury. If you know you have some reporting errors or omissions, consider making corrective filings for past years, as well as paying taxes without being asked. The IRS is generally much more forgiving if a taxpayer makes corrective filings before being audited or investigated.
How To File Your Crypto Taxes (And Not Get Screwed)
Here are seven things you need to know about cryptocurrency taxes.
Cryptocurrency and blockchain technology are transforming the world of finance. More than 21 million U.S. adults own assets like bitcoin (BTC, -3.1%) or ethereum (ETH, +2.01%), crypto credit cards are growing in popularity, and artists are making thousands of dollars selling non-fungible tokens (NFTs).
These products and positions all raise tax implications that too often go unconsidered. Purchasing an NFT with bitcoin? Taxable. Trading your dogecoin (DOGE, -12.32%) for ethereum? Taxable. Using your staking income to buy a coffee from a vendor accepting crypto? Taxable.
You get the idea. Taxes around cryptocurrency can be complicated. Whether you’ve just started dabbling in the world of crypto or you’re a long-time believer, it’s important to understand how cryptocurrency tax reporting works so that you can stay compliant and enable this transformative innovation to continue to thrive.
1. Most Crypto Activity Is Taxed As Property – And You Need To Report More Than Just Cashing Out
There’s a common misconception that you have to report crypto taxes only when you sell your crypto for fiat currency. While that is indeed a taxable event, it’s not the only activity that you need to include on your return.
For most people who invest and trade cryptocurrency, it’s taxed as property much like stocks. That means you’ll have to report capital gains or losses on Form 8949 for the following activities:
* Selling your crypto for cash
* Trading one cryptocurrency for another cryptocurrency
* Using cryptocurrency at a merchant as payment (for those who use crypto debit cards, this applies to you as well)
* Buying an NFT with crypto.
2. Crypto Earned As Income Also Needs To Be Reported On Your Tax Return
It’s also possible to have received cryptocurrency as income. These interactions will need to be reported on a separate part of your return:
* Receiving airdropped tokens resulting from a hard fork
* Staking or mining cryptocurrency
* Getting paid in crypto.
3. If You Don’t Report Your Crypto Taxes, You Run The Risk Of Being Audited By The IRS
Failure to report any of the taxable events will likely result in an Internal Revenue Service audit. For the first time this year, the IRS has placed a question at the top of Form 1040 that asks “[a]t any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
So, if you’ve done any of the above taxable crypto activities, it’s in your best interest to answer that question honestly and report your taxes on the proper forms. It should be noted that more and more exchanges are starting to report crypto activities to the IRS through From 1099-B, which means the IRS is already aware of some of your activities.
4. Not All Crypto Activity Is Taxable
Good news! Just because you own crypto doesn’t mean you owe taxes. If you bought crypto and haven’t disposed of it, you have no taxable activity to report. Nontaxable activities include:
* Transferring assets between exchanges
* Buying cryptocurrency (although nontaxable, it does set your cost-basis)
* Gifting cryptocurrency (this excludes large gifts that may trigger other tax obligations)
* Donating cryptocurrency (instead, this is tax deductible!).
While donating cryptocurrency is not a taxable event, it is recommended that you do report the donations on your tax return because you may be eligible for the itemized charitable deduction.
5. Wash Sale Rules Don’t Apply To Crypto
Cryptocurrency provides the unique opportunity of being able to appreciate wealth over time while saving money on taxes. Because wash sale rules don’t apply to cryptocurrency, you can enjoy the tax advantages of offsetting taxable gains with investment losses and immediately buy back the same asset to maintain your position in the asset (i.e. continue to hodl).
6. Crypto Tax Rates Depend On Your Holding Period
The rate cryptocurrency is taxed at depends on how long you held the asset for and your annual income. If you held the asset for less than one year, your cryptocurrency gains will be taxed as a short-term capital gain at the same rate as your ordinary income, with a range of 10% – 37%. If you held the asset for more than one year, it will be taxed at the long-term capital gains tax rate, with a range of 0% – 20%.
7. Capital Losses Can Be Used To Minimize Your Tax Liability
That’s right! While a bummer at the time, capital losses can be used to offset your gains and reduce the amount of taxes you could owe! Savvy crypto investors are well aware of the tax implications of their trades throughout the year – and they use that to their advantage through a strategy called tax-loss harvesting.
And, even if you don’t have capital gains to offset, tax-loss harvesting could still be beneficial as a capital loss deduction from your income.
Time To File Those Crypto Taxes? Follow These Steps:
Step 1: To start, you’ll need a list of all your exchanges and transactions, including any 1099 forms received from exchanges.
Step 2: Next, calculate your capital gains and losses by subtracting your cost-basis, or the price you bought the asset at, from the price you sold the asset at (Capital Gain or Loss = Selling Price – Cost-Basis).
Step 3: Fill out your capital gains and losses on IRS Form 8949 for all events taxable as property.
Step 4: Transfer totals from your IRS 8949 to Form 1040 Schedule D.
Step 5: Fill out any remaining cryptocurrency income on Form 1040 (remember, this is from mining or staking, air drops, or getting paid in crypto).
That’s it! At least for most people. If you are a higher volume trader, the process gets much more complex and it’s recommended that you use crypto tax automation software to calculate your gains and losses.
Keep in mind that the more attention you pay to the tax implications of your crypto transactions year round, the easier you’ll have it come tax time. Not only that, but by making strategic trades in loss positions, you can reduce your tax liability – or even get a tax refund! Your future self will thank you later.
IRS Taps TaxBit To Audit Bulk Crypto Transactions
TaxBit will aggregate transaction data and ensure that the right figures were reported by the taxpayer.
The Internal Revenue Service (IRS) has contracted with crypto tax service provider TaxBit to help the U.S. tax agency audit entities and individuals.
Utah-based TaxBit announced the one-year contract Tuesday, saying it would provide auditing services for cryptocurrency transactions as needed by the IRS, helping the agency verify whether high-volume traders accurately reported their crypto taxes. The company just raised $100 million in a Series A funding round.
“We’ll be providing data analysis and support and calculations for the IRS to help them really get to the right answer,” said Seth Wilks, TaxBit’s director of government relations.
“[We’ll fill] some of the gaps in tools that just don’t exist right now within their own ecosystem, and so we’re coming in to make sure that they are fully understanding the data.”
The IRS will not be specifically auditing TaxBit customers with the contract. Rather, the federal agency will provide its own data and ask Taxbit to analyze the transactions as part of this contract.
Nor are these crypto-specific audits, Wilks said. The IRS audits a number of entities and people every year, initiating some of these examinations through a random selection of taxpayers and others based on red flags. When these audits include cryptocurrency transactions, the IRS will tap TaxBit to conduct any necessary analysis.
In other words, the IRS may not even be alleging wrongdoing or tax evasion for some of these audits.
While Wilks said he could not share specific details about the contract, he did say TaxBit would likely be examining high-volume entities or traders, who report thousands or millions of transactions per year.
“Those are more high-net-worth individuals or investment funds,” he said. “The typical everyday investor … we won’t see them.”
TaxBit will use its platform, which it’s been building out for three years, to aggregate and normalize any inputted data before automatically calculating the gains and losses. This data can come from different exchanges or wallets.
The rest of the TaxBit team may be tasked with looking for missing transactions or verifying that all the transactions that should be reported are filed (in the U.S., every crypto sale or transfer creates a taxable event).
“We see our role as, number one, [being] very unbiased, … [W]e’re just here to help get it right,” Wilks said. “But also, the report that we’re providing to the IRS will be provided to the taxpayers as well, so it will help them. To an [extent] that they forgot to provide something or [are] missing information, they have an opportunity to rectify that and provide it.”
The challenge for the IRS is that while some exchanges and individuals file specific forms to the agency, others just provide a CSV file with transaction data.
In Wilks’ view, the move indicates a growing regulatory understanding that crypto is here to stay.
“They’re seeing more and more people who are filing crypto,” he said of the IRS, “which means that in their random audit selections they’re going to see more people reporting cryptocurrency.”
IRS Will Seize Your Crypto If You Can’t Pay Back Taxes
If you’re a cryptocurrency holder with past-due tax debts, your provable holdings may be confiscated by the IRS if you don’t pay back what you owe.
The United States Internal Revenue Agency is prepared to seize the holdings of cryptocurrency owners who are struggling to pay their unpaid tax debts, sending a strong signal that the agency is treating digital assets the same as any other type of property that can be confiscated.
Robert Wearing, deputy associate chief counsel for the IRS, told a virtual conference held by the American Bar Association that the government classifies digital assets as property. As such, these assets may be confiscated to satisfy outstanding tax debt that hasn’t been repaid.
“The IRS will seize that property and will attempt to follow its usual procedures to sell it and use it to satisfy collection,” Wearing said, according to Bloomberg.
Bitcoin and other cryptocurrencies are classified as property from the perspective of federal tax law, according to a 2014 notice published by the IRS. The agency explained:
“Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.”
Although the IRS has been able to obtain data on cryptocurrency users via exchanges like Coinbase and Kraken, proving ownership becomes much harder when the assets are stored in hardware wallets.
In addition to scalability issues, the tax implications of digital assets may be one reason that Bitcoin has yet to take off as a robust medium of exchange. That’s because every time BTC is converted to cash, it’s technically a taxable event in the eyes of the IRS and many other tax agencies around the world.
Crypto investors have been able to skirt taxes legally by borrowing against their holdings — something that MicroStrategy CEO Michael Saylor strongly advises. Platforms like BlockFI, Celsius and others allow users to obtain collateralized loans on their digitalasset holdings.
H&R Block Needs Clear Regulations Before Dealing With Crypto Taxes, CEO Says
Ultimately, crypto taxing could be part of the business, H&R Block CEO Jeff Jones added.
As the debate surrounding crypto regulations heats up, tax professionals are taking a more cautious approach to deal with Bitcoin (BTC) and other earnings. The United States-based tax preparation service company H&R Block is looking for more precise regulations before handling their customers’ crypto holdings.
Answering tax-related questions on CNBC, H&R Block CEO Jeff Jones called crypto an interesting thing in terms of taxation:
“Because it’s not federally regulated, it’s really not a place we weigh in with consumers much.”
While the current regulatory state of crypto is muggy, Jones doesn’t expect a total crypto ban and expects crypto taxing to be a part of their business in the future:
“Ultimately, we think it could be a place we help customers. But today, it’s not a place where we do a lot of business.”
American regulatory bodies are rapidly working to figure out how to deal with cryptocurrency. Last week’s market crash which saw about a 50% plunge on most coins seems to speed up the process.
Avanti Financial CEO Caitlin Long said a regulatory crackdown regarding crypto in the U.S. has begun. She took an optimistic stance on the regulatory work, claiming that it won’t end up in a “Bitcoin ban.”
Tax lawyer Robert W. Wood summarized that “the IRS wants crypto tax data in a big way, from asking about crypto on each tax return to its latest Hidden Treasure initiative.”
The U.S. Department of Treasury recently released a report about tax proposals for President Joe Biden’s American Families Plan. The report proposes that crypto exchanges and custodians should inform the Internal Revenue Service about any crypto transactions greater than $10,000.
IRS Needs Congressional Authority To Handle Crypto, Says Chief
“Most crypto, virtual currencies are designed to stay off the radar screen,” said Charles Rettig.
Internal Revenue Service chief Charles Rettig called out lawmakers for not taking the initiative on addressing the problem of many U.S. residents not paying taxes on crypto.
In a Tuesday senate hearing on the IRS’ fiscal year 2022 budget, Rettig said that the agency would likely require a “clear dictate from Congress” to regulate crypto. The IRS has listed $32 million in its budget for “crypto-related enforcement operations” as well as $41 million related to cybercrime in its attempts to address the issue of non-reporting or underreporting taxpayers.
“The authority for us to collect that information is critical,” said Rettig. “The most recent market cap in that world — in the crypto world — exceeded $2 trillion and more than 8,600 exchanges worldwide, and by design most crypto, virtual currencies are designed to stay off the radar screen, so we will be challenged.”
Rettig was responding to Ohio Senator Rob Portman, who in April said he intended to introduce a bipartisan bill aimed at addressing the problem of many crypto users in the U.S. not paying taxes. The IRS chief added that “non-filer virtual currency” would be one area in which the agency would be focusing to close the tax gap in the future, and he “would appreciate the opportunity” to work with lawmakers on the issue.
Last month, officials at the Treasury Department called for crypto exchanges and custodians to report transactions greater than $10,000 to the IRS as part of a tax proposal for President Joe Biden’s American Families Plan. The agency currently has no independent verification of such transactions, potentially leading to a widening tax gap.
Rettig Added At The Hearing:
“We do need additional tools, and we absolutely need additional resources.”
According to data from the IRS in October 2020, 83.6% of taxes were paid “voluntarily and on time” from 2011 to 2013. However, the Treasury Department has projected that the tax gap could reach roughly $7 trillion total over the next decade should the government fail to take action.
More IRS Crypto Reporting, More Danger
The U.S. authorities are becoming seriously interested in crypto, making unreported crypto more dangerous.
The United States Internal Revenue Service classifies crypto as property, meaning you can trigger taxes every time you use crypto to buy something. You might be using it to pay for a Tesla electric vehicle — oh, sorry, that’s not possible anymore — a cup of coffee or even a castle in Europe.
You might be paying someone for services, either as an independent contractor or as an employee. But no matter what the transaction, you may have a gain or a loss, something quite apart from the income tax impact on the person you are paying.
Not So Simple With Taxes
The tax impact might even be made more difficult by the wild fluctuations in value that tend to characterize crypto investments. Think about paying for services too: Say you pay someone as an independent contractor; to report the payment, you’ll need to issue them an IRS Form 1099. Whatever the type or amount of crypto you use, the IRS will say you paid them the current market value of the crypto on that day.
When you pay an independent contractor and issue a Form 1099, you can’t enter “1,000 Bitcoin (BTC)” on the form. You must put the value in U.S. dollars as of the time of payment. The contractor you pay might keep the crypto or might sell or transfer it the same day, but that doesn’t impact your taxes.
How about wages paid to employees? Wages paid to employees using crypto are taxable and must be reported on a Form W-2. They are also subject to withholding and payroll taxes.
However, if you pay someone in property, how do you withhold taxes? You could pay some cash and some Bitcoin and withhold plenty on the cash, but that can be complex and messy. Of course, you could also opt for paying the person as a contractor. But remember, worker status issues can happen in any context, including this one.
Thus, investing and dealing in crypto inevitably involves significant tax issues, whether you like it or not. It is no secret that the IRS wants you to report your crypto gains. You can report crypto losses too, but the IRS does not care as much about whether you claim those. Income and gains, on the other hand, matter a lot to the IRS. The IRS still believes there are major compliance problems in the crypto community, so there’s continuing distrust and extra scrutiny.
The latest evidence of this continuing issue is that the U.S. Treasury Department expects to publish new rules saying businesses that receive crypto worth more than $10,000 would have to file a currency transaction report with the government naming names and giving details. You might think you won’t get caught, but the risks are growing. The best way to avoid penalties, or worse, is to disclose and report as accurately as you can.
Remember those 10,000 letters sent by the IRS to crypto taxpayers? And how about all the IRS summonses to Coinbase, Kraken and others? The hunt is still on, as the crypto tax question on IRS Form 1040 should indicate. The Department of Justice’s Tax Division successfully argued that the mere failure to check a box related to foreign bank account reporting is willfulness, per se; the same argument could get applied to crypto accounts.
Willful failures carry higher penalties and an increased threat of criminal investigation. The Criminal Investigation Division of the IRS has met with tax authorities from other countries to share data and enforcement strategies about cryptocurrency tax evasion.
When you file your taxes, the IRS asks a simple question: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It sounds pretty simple, yes or no, right? What could go wrong? It’s not asking for any numbers or details — although if you sold some, it should go elsewhere on your tax return.
After all, since crypto is property to the IRS, any sale will produce either a gain or loss. Many other transfers will as well, even a swap of one type of crypto for another. The latest step was the announcement that the Treasury Department plans to impose new reporting requirements for crypto.
Soon, banks and financial institutions will have to report information to the IRS. Exchanges, custodians and crypto payment services are slated to have to do the same. Curiously, the government is taking pages of its playbook from the rules surrounding cash transactions, even though the IRS said way back in 2014 that crypto was property, not currency.
For cash, reports go on IRS Form 8300 for payments of over $10,000. The IRS even has a list of FAQs regarding reporting cash.
For many years, businesses have been required to report cash payments of more than $10,000, which has prompted all sorts of (usually ill-advised) behavior by people to try to avoid doing so. So-called “structuring transactions” can be a crime, even if all the cash you are trying to use is entirely yours.
Therefore, if the $10,000 baseline is implemented for crypto reporting, my guess is there will be people trying to keep something private who end up in trouble for trying to sidestep a reporting trigger. The Bank Secrecy Act requires financial institutions to report currency transactions above $10,000 to the IRS. This law also makes it a crime to structure currency transactions to avoid the reports. The IRS Criminal Investigation Division enforces the rules on cash transactions.
Yet, a 2017 report said that the law is enforced primarily against individuals and businesses whose income was obtained legally. That’s what happened to former House Speaker Dennis Hastert, who was indicted over structuring his own money. Eventually, he was sentenced to 15 months in prison. Could crypto enforcement end up the same way?
If the new crypto reporting threshold of $10,000 goes the same way as cash reporting has, some people may try to structure around the reporting. If they do, and if the rules are similar to the cash reporting rules, that could be quite dangerous.
IRS Adds Thousands Of Auditors As Senate Considers Enforcement Funds
The Internal Revenue Service is hiring thousands of new auditors as it gears up for a potentially massive tax-enforcement push if Congress is able to pass an infrastructure plan that includes $40 billion to expand audits on the wealthy.
The IRS small business and criminal investigations divisions are adding thousands of new tax enforcement employees as the agency seeks to rebuild the roughly 17,000 audit staff lost in the past decade, officials said Friday.
The agency’s small business unit will add about 2,000 new workers, including 1,300 revenue agents, before the IRS’s fiscal year ends at the end of September, De Lon Harris, co-commissioner of the division, said at a tax conference at New York University. The criminal investigations division will add more than 500 people this year, with about half of those being special agents, said James Lee, who leads the criminal unit.
The figures represent a significant hiring increase from recent years, when the agency has struggled to replace auditors who retired or left the federal government. The small business team has added a couple hundred agents in recent years, Harris said. The criminal investigations division has hired fewer than 330 new people in the five year period through the 2019 fiscal year, Lee said.
The additional staff could put the IRS in position to greatly expand audit capacity quickly if Congress is able to pass a bipartisan infrastructure investment plan, which includes $40 billion for the agency over a decade and is expected to generate $100 billion in net new tax revenue. A group of 21 senators backed a deal this week, but the plan is still subject to weeks — or months — of negotiation before it could become law.
The IRS has faced criticism in recent years as audit rates — particularly those for corporations and high-earning individuals — fell amid decreasing staffing and budget levels. IRS Commissioner Chuck Rettig told a Senate committee earlier this year that the gap between taxes owed and those actually paid this year could be $1 trillion, a figure that is multiples of previous estimates.
The IRS is already planning to receive a slight funding boost in the coming months. Government funding legislation being considered in Congress calls for $13.6 billion for the IRS next year, an increase of $1.7 billion on what it received for fiscal year 2021.
Are Cryptocurrency Ransom Payments Tax-Deductible?
Any ransom payments made in cryptocurrency are taxed as property rather than currency, so be aware of the U.S. tax implications.
About 2,000 years ago during its Han dynasty, China made peace with some of the nomadic people of Central Asia who continuously ransacked Silk Road traders for an easy payday. It did so in order to fully establish the Silk Road trade route, which stretched from China to Europe, and to secure a great source of wealth from trading in luxury goods.
Now, as trade increasingly has shifted to the digital realm during the global COVID-19 pandemic, cyberattackers are taking advantage of organizations’ lax cybersecurity measures. They are using ransomware to lock these organizations’ data with encryption until a ransom payment in cryptocurrency is made. Back in 2019, 98% of ransomware payments were made in Bitcoin (BTC).
Anne Neuberger, United States Deputy National Security Adviser For Cyber And Emerging Technology, Explained:
“The number and size of ransomware incidents have increased significantly. […] The U.S. government is working with countries around the world to hold ransomware actors and the countries who harbor them accountable, but we cannot fight the threat posed by ransomware alone. The private sector has a distinct and key responsibility.”
The administration of President Joe Biden is moving to treat cyberattacks — which are estimated to cost $1 trillion a year and often take the form of ransomware — as a national security threat. Intelligence agencies have concluded that they pose an elevated threat to the country, with gasoline, food supplies and hospital systems at risk.
Recently, the U.S. Department of Justice seized 63.7 BTC (worth approximately $2.3 million at the time) representing the proceeds of a ransom payment made by Colonial Pipeline to the group known as “DarkSide.” It did so via a coordinated effort with the DoJ’s Ransomware and Digital Extortion Task Force, which collaborates with domestic and foreign government agencies in addition to private-sector partners to combat this significant criminal threat.
Lisa Monaco, the DoJ’s deputy attorney general, noted: “Following the money remains one of the most basic, yet powerful tools we have.” She continued:
“Ransom payments are the fuel that propels the digital extortion engine, and [..] the United States will use all available tools to make these attacks more costly and less profitable for criminal enterprises.”
Paul Abbate, Deputy Director Of The Federal Bureau Of Investigation, Added:
“We will continue to use all of our available resources and leverage our domestic and international partnerships to disrupt ransomware attacks and protect our private sector partners and the American public.”
U.S. Tax Implications Of Ransom Payments In Cryptocurrencies
One question is whether ransomware payments can be considered an “ordinary and necessary” cost of doing business and be deducted from taxable income as a theft loss under Sections 162(a) and 165(a) of the Internal Revenue Code, which provides the authority to deduct any losses that were not covered by insurance or some other means.
There are several judicial and administrative definitions of theft, and the Internal Revenue Service’s definition seems broad enough to encompass a cyberattack and allow for ransomware payments made in cryptocurrency to be deducted as a business expense for federal tax purposes.
However, under Section 162(c), if the ransom payment in cryptocurrency constitutes an illegal bribe, illegal kickback, blackmail payment or other illegal payment — such as one made to a group classified as a terror organization under any U.S. law — it would not be tax-deductible.
Thus, a taxpayer should distinguish illicit payments from ransomware cryptocurrency payments by highlighting the theft of property. Questions of illegality may arise when paying a ransomware demand in cryptocurrency to a cybercriminal with a known connection to a sanctioned or boycotted foreign government.
Here is an example, provided by Elliptic co-founder and chief scientist Tom Robinson: “Elliptic was first to identify the Bitcoin wallet used by the DarkSide ransomware group to receive a 75 Bitcoin ransom payment from Colonial Pipeline. […] DarkSide [which is believed to be based in Eastern Europe] is an example of ‘Ransomware as a Service’ (RaaS).
In this operating model, the malware is created by the ransomware developer, while the ransomware affiliate is responsible for infecting the target computer system and negotiating the ransom payment with the victim organisation. This new business model has revolutionised ransomware, opening it up to those who do not have the technical capability to create malware, but are willing and able to infiltrate a target organisation.”
Ransomware attackers may even offer a victim company a discount if it transmits the infection to other companies. These ransom payments in BTC are then laundered on dark web markets, according to a report issued by Flashpoint and Chainalysis.
Any ransom payment made in cryptocurrency is taxed as property rather than currency. Therefore, taxpayers are expected to keep detailed records of these ransom payment cryptocurrency transactions, report any gains and report the fair market value of any mined cryptocurrency on their tax returns as well.
Additionally, the Financial Crimes Enforcement Network, or FinCEN, also regulates cryptocurrency-related transactions pursuant to the Bank Secrecy Act (BSA) by stating that “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter.”
Thus, under the BSA, a cryptocurrency transmitter is required to complete a risk assessment, develop a written program to avoid money laundering, designate an individual compliance officer and complete other action items.
It should be noted that other profiting and culpable participants in a Bitcoin ransom payment scheme might find themselves facing criminal and tax fraud/evasion penalties.
For example, John McAfee, founder of the antivirus company bearing his name, had recently been charged with various tax crimes in the U.S. relating to nominee-held cryptocurrency transactions and was facing many years in prison if convicted. This may have been a factor in his decision to commit suicide in a Spanish jail after the court ruled he could be extradited to the United States.
In remarks to the U.S. Senate Appropriations Committee, FBI Director Christopher Wray advised ransomware victims to not pay a ransom to retrieve hijacked data or regain network access.
He said that “In general, we would discourage paying the ransom because it encourages more of these attacks, and frankly, there is no guarantee whatsoever that you are going to get your data back,” adding: “We have to make it harder and more painful for hackers and criminals to do what they are doing.” And he continued:
“We took upwards of 1,100 actions against cyber adversaries last year, including arrests, criminal charges, convictions, dismantlements, and disruptions, and enabled many more actions through our dedicated partnerships with the private sector, foreign partners, and at the federal, state, and local entities.”
IRS Tweaks Crypto Question Language On 2021 1040 Draft Form
The revised question asking taxpayers about crypto assets is much simpler and clearer.
The U.S. Internal Revenue Service may finally be close to more clearly stating how crypto assets should be taxed.
In a draft form of the 1040 form for 2021 released on Wednesday, the tax agency has proposed asking the question “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
That compares to the lengthier 2020 question that asked “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The 2020 version of the question generated considerable confusion about whether simply acquiring cryptocurrency or moving it from one wallet to another would incur taxes.
In its guidance last year, the IRS made it clearer that cryptocurrency transactions would only be taxable if they were sold, exchanged for goods or services or exchanged for property including other crypto assets.
The new language, if adopted, would make it much clearer which type of transactions the IRS has in mind.
Bitcoin Mining Firm Wants To Help Taxpayers Avoid Obligations By Sending Proceeds To IRAs
The IRS has considered crypto mining revenue as part of taxable income since 2014.
North American mining and hosting firm Compass Mining is offering a new tax avoidance method for savvy crypto miners that file in the United States.
In a Thursday announcement, Compass Mining said it had partnered with IRA provider Choice by Kingdom Trust to help Bitcoin users mine directly to their IRAs “without ever triggering a taxable event.”
Under current U.S. law, income is often the only taxable source of funds for many who file returns. Crypto users who purchase tokens may be required to declare the holdings in their tax returns, but may not necessarily have to pay the government anything unless they choose to cash out — a taxable event under capital gains laws.
Likewise, revenue from mining crypto is often considered income, requiring miners to pay taxes for not only generating blocks, but also liquidating the coins. Choice and Compass claim their product allows miners to avoid taxes on mining revenue “in the short term or indefinitely,” depending on the type of IRA.
Compass specified that Choice IRA holders had to have enough funds to purchase mining hardware, with revenue sent to the account after purchasing and coming online. Choice CEO Ryan Radloff and Compass CEO Whit Gibbs seemingly shied away from labeling the product as a method of tax avoidance, instead referring to it as a “tax-advantaged” or “tax-efficient” IRA.
However, the method is not without precedent, as many wealthy people in the United States use questionable — but often perfectly legal — means to avoid paying taxes. Last month, ProPublica reported PayPal co-founder Peter Thiel had used a Roth IRA — an account generally not taxed — to invest $2,000 more than two decades ago and turn it into a $5 billion fund today, seemingly out of the IRS’ reach.
“There is a strain of thinking in America that not paying taxes is smart,” said ProPublica journalist Jesse Eisinger in a later interview. “The federal government needs to be funded for basic services to keep us safe and healthy and keep society functioning. The government depends on taxes.”
In the case of crypto mining, the IRS seemingly broke new ground when declaring mining activities would result in taxable gross income in 2014, labeling newly generated blocks as rewards. Such taxes may provide a disadvantage to up-and-coming mining firms in the U.S. without enough capital to cover mined tokens.
Crypto Investors Get Ready For More Taxes — But Clearer Rules
Sure, you might have to actually pay U.S. taxes on those crypto trades. But at least it will be easier to figure out how much you owe.
A new push by Congress to require crypto brokers to report transactions to the Internal Revenue Service could create some unwelcome tax bills but could clarify rules for traders and users of Bitcoin and other digital tokens, potentially strengthening the system in the long run, people in the industry say.
The new rules — a last-minute addition to the $550 billion bipartisan infrastructure package now being considered by the U.S. Senate — would also force businesses to disclose trades of digital assets of more than $10,000. The provisions are designed to raise $28 billion.
The measures add to increased scrutiny the IRS has recently applied to traders of Bitcoin, Ethereum and other digital assets.
The agency has promised it will issue new rules that clarify how those virtual currencies should be taxed.
People who trade digital currencies must pay income taxes on any gains, even if some crypto investors have been ignoring their tax obligations. But even for those who want to follow the law, it can be difficult to keep track of what’s owed.
Filing taxes on crypto trades can create huge headaches, especially for those who conduct multiple transactions each year.
While traditional stock brokerages are already required to send detailed tax forms to clients, crypto exchanges aren’t. Even if firms wanted to help their clients file taxes, it’s not always clear how to do that under the current regulations.
In addition, tax obligations can pop up in surprising places. People who use digital currencies to pay for things — like, say, a Tesla, or a pizza — are supposed to pay taxes on any increase in value of the crypto they spend. It’s a key difference between using digital “currencies” and actual, fiat currencies such as the U.S. dollar to conduct commerce.
Andrew Johnson, a project manager at a large national bank, has invested tens of thousands in crypto and uses a dedicated service to figure out what he owes in taxes. He’s been using CoinTracker, which he learned about though a YouTube channel that he trusts.
“Most would benefit from a tracking service to help with taxes,” he said. “For me, I decided it was worth the cost to not have to manually track all the trades I did — which could take hours or days.”
Cryptocurrency exchanges and others in the industry have raised concerns that the U.S. Senate is rushing the rules into effect without consulting them first.
Some wondered whether the new rules and regulatory attention would encourage mainstream investors to join the space — or hurt the appeal of cryptocurrencies by killing its anything-goes ethos.
“Some portion of crypto investors may start to have second thoughts about the tax consequences,” said Michael Bailey, director of research at FBB Capital Partners. “It’s almost like crypto is a really fun party, but it’s getting late and a few people are starting to look at their watches as they think about the next morning.”
For years, the IRS has been warning taxpayers to report cryptocurrency transactions on their tax returns. More recently, the agency has made clear that fighting tax evasion through digital currencies is a top priority.
The IRS has started collecting vast amounts of data on blockchain transactions, has subpoenaed crypto exchanges and worked on coordinating enforcement with foreign governments. Last year, the IRS added a yes-or-no question to the front page of the 1040 income tax form asking whether filers had sold or exchanged virtual currencies.
The jurisdiction of U.S. law enforcement only reaches so far, and crypto traders who prize secrecy could flee to offshore exchanges, or take other measures to avoid being spotted by the IRS. However, the U.S. has already shown it can crack down on foreign tax evasion by, for example, forcing banks in Switzerland and elsewhere to divulge details on American clients.
Even if parts of the crypto universe remain hidden, it may be difficult to move those assets onshore and turn them into legitimate wealth.
“If a U.S. taxpayer is into crypto for the ability to underreport income from sales or transfers, chances are someone in a chain somewhere may have to disclose it,” said Julio Jimenez, an attorney who is principal in the tax services group at Marks Paneth LLP.
All this isn’t necessarily a bad thing for law-abiding investors in digital assets if they end up with clearer rules and easier-to-understand annual statements from crypto firms.
“I think it will have a positive effect on the industry,” said Brett Cotler, an attorney at Seward and Kissel LLP in New York who specializes in blockchain and cryptocurrency. While exchanges and fintech firms that deal in digital currencies may have to spend money upgrading reporting and compliance systems, it will improve customer service, he said.
Johnson, the crypto trader, said he thinks the new rules will help legitimize the crypto ecosystem and foster international growth.
“While at its heart, crypto assets have been a means of moving value outside of government-controlled rails, I still understand the need for regulation in the crypto space in order for wider adoption to take place,” he said.
IRS Makes New Crypto Broker Guidance A ‘Priority’ In 2021-22 Plan
Biden’s Treasury Department is opening another front in its effort to police crypto tax cheats.
The U.S. Treasury Department and Internal Revenue Service plan to formulate guidelines detailing the reporting requirements of cryptocurrency brokers, escalating a Biden-era push to more closely scrutinize the space.
On Thursday, the department included the broker project in its annual “Priority Guidance Plan.” It is one of 193 projects now slated to receive additional resources through June 30, 2022.
The government mandate is reminiscent of last month’s infrastructure bill fracas that saw senators spar over the minutiae of crypto tech. Lawmakers’ failed effort to alter the bill’s definitions of a crypto broker put a national spotlight on the industry’s uneasy relationship with U.S. tax law.
However, the guidance plan, dated Sept. 9, is a separate effort from the congressional bill, on which the House of Representatives will vote at the end of the month.
Biden’s Treasury Department began campaigning for closer crypto monitoring months earlier. In late May, it rolled out a series of budget proposals that envisioned expanding crypto brokers’ information reporting requirements, a move it said would quash tax evasion.
The planned guidance is mum on specifics. It will apparently address “regulations regarding information reporting on virtual currency under § 6045.” That section of the U.S. Code deals with “Returns of brokers,” according to Cornell Law School.
The IRS deemed that issue a “tax administration” project. It also plans to issue “guidance concerning virtual currency” in an apparently separate effort in the “general tax issues” bucket.
“The published guidance process can be fully successful only if we have the benefit of the insight and experience of taxpayers and practitioners who must apply the rules,” the document said. “Therefore, we invite the public to continue to provide us with their comments and suggestions as we write guidance throughout the plan year.”
Bloomberg reported last month that the Treasury Department does not intend to broaden the definition of a broker beyond just trading platforms. However, tax experts told CoinDesk they were skeptical of this claim.
Crypto Tax ‘A Top Enforcement Priority,’ Reminds IRS Commissioner
The IRS’ commissioner says crypto gains are taxable in the cannabis industry as the IRS treats cryptocurrencies as property.
The United States Internal Revenue Service continues to propose new tax reforms to regulate the crypto investments in the U.S., with the latest notice sharing tax obligations for the marijuana industry.
The notice, signed by IRS Small Business/Self-Employed Division Commissioner De Lon Harris, reflects the priorities of the United States federal agency to ensure cryptocurrency tax compliance among local businesses that grow, distribute and sell cannabis.
Commissioner Harris said that the use of cryptocurrencies in the cannabis industry is one of the top enforcement priorities of the IRS. The statement coincides with the recent proposal by the Senate lawmakers from July 2021 that intends to tighten taxation and reporting rules on businesses dealing in cryptocurrencies. According to Harris:
“Those who use it [cryptocurrencies] need to understand that the IRS considers it property, and there are gains that are taxable.”
In addition, the IRS commissioner recommended cannabis businesses work with reputable exchanges for converting cryptocurrencies into U.S. dollars.
The IRS has not yet asked businesses to report high-worth crypto transactions explicitly. However, companies will need to file Form 8300 for every transaction that exceeds $10,000.
The Senate’s bipartisan infrastructure deal recently that saw last-minute amendments proposed means to raise funds worth $28 billion by taxing crypto investments and transactions.
Following suit, more recently, on Sept. 13, Democrats in the House of Representatives proposed new tax initiatives that would increase the tax rate on long-term capital gains. If approved, the law will increase crypto taxes for “certain high-income individuals” by 5%.
According to Cointelegraph’s report, the bill also recommends a surtax of 3.8% on net investment income, bringing up the tax rate to 28.8% for select investors.
Additionally, the new tax plan will impose the wash-sale rule on cryptocurrencies and other digital assets, which prevents investors from claiming capital gains deductions. Currently, U.S. lawmakers suspect crypto investors of using wash sales to manipulate the capital gains of their portfolio.
Bitcoin Holders Have A Few Months To Take Advantage Of A Tax Loophole That Could Go Away In 2022
The House Ways and Means Committee is trying to shut down one of the most lucrative crypto tax loopholes, a move that could cost holders of bitcoin and other virtual coins nearly $17 billion, according to an estimate by the Joint Committee on Taxation.
The bill would apply the so-called wash sale rule to digital assets, according to a summary report by the committee, treating them like stocks. The rule forces an investor to wait 30 days between the selling of a security and the repurchasing of it, when a tax deduction is involved.
It’s one of the tax hikes Democrats are considering as a way to fund President Biden’s $3.5 trillion in proposed spending to expand the U.S. social safety net. While Democrats face many hurdles to finalizing legislation and getting it passed in a deeply divided Congress, crypto experts are already looking at ways to help investors minimize their 2021 tax.
Should the proposal pass, taxpayers have until Dec. 31, to take full advantage of the existing loophole, which allows crypto investors to sell coins at a loss for tax purposes and immediately buy them back. Given the recent plunge in crypto prices — the market is down 26% from a record in May — the timing is ripe for tax-loss harvesting.
Minimizing Your 2021 Crypto Tax Bill
The IRS currently classifies digital currencies like bitcoin as property, so losses on crypto holdings are treated much differently than for stocks and mutual funds.
“One thing savvy investors do is sell at a loss and buy back bitcoin at a lower price,” said Shehan Chandrasekera, head of tax strategy at crypto tax software company CoinTracker.io. “You want to look as poor as possible.”
Chandrasekera added that investors can take advantage of an unlimited amount of losses and “carry them forward into an unlimited number of tax years.”
The bigger the market for cryptocurrencies, the more this happens.
“I see people doing this every month, every week, every quarter, depending on their sophistication,” Chandrasekera said.
Accruing these losses is how investors ultimately offset their future gains and lower the capital gains tax that would apply for other assets. In other words, they reduce what they owe to the IRS.
Quickly buying back the cryptos is another key part of the equation. If timed correctly, buying the dip enables investors to catch the ride back up, assuming there’s a rebound. Digital coins are notoriously volatile, with steep drops often followed by rapid spikes.
Here’s an easy way to the think about the equation. Someone who purchased one bitcoin for $10,000 and sold it for $50,000 would face $40,000 of taxable capital gains if bitcoin were like stock in Apple or Tesla.
But, because of the wash sale loophole, if this same person had previously harvested $40,000 worth of losses on earlier crypto transactions, they’d be able to offset the tax they owe.
Chandrasekera said it’s an increasingly popular strategy among his company’s customers, but he cautioned that thorough bookkeeping is essential.
“Without detailed records of your transaction and cost basis, you cannot substantiate your calculations to the IRS,” Chandrasekera said.
What Might Change
The wash sale rule would take effect Jan. 1. But to get there, it has to be included in legislation that passes the House and the Senate.
Chandrasekera is betting the rule makes it into the final bill because it aligns with crypto being treated as a security subject to 1099-B reporting,” like other investments, he said.
But as it’s written, the rule would not be applied retroactively, so crypto investors have a window available to take advantage of asset sales.
“Taxpayers can still reduce their 2021 tax bill, but they only have a few months left to do that,” said Chandrasekera. “With the market down the last two weeks, it’s great timing.”
The IRS Wants To Look At Your Bank Account
Its quest for missing revenue would threaten taxpayer privacy.
On your next trip to the ATM, imagine that Uncle Sam is looking over your shoulder. As if your annual tax filing wasn’t invasive enough, the Biden Administration would like a look at your checking account.
Charles Rettig, commissioner of the Internal Revenue Service, wants banks to report annual cash flows for ordinary account holders. Treasury Secretary Janet Yellen is promoting the plan, and the House Ways and Means Committee is debating whether to include this mandate in the Democrats’ $3.5 trillion spending bill.
Ms. Yellen says the reporting will help to catch wealthy tax dodgers. In a recent letter to the committee she said the plan would reveal “opaque income streams that disproportionately accrue to the top.” Treasury and congressional Democrats hope taxpayers will report income more accurately if they know the feds have their account information.
Yet the IRS plans to review every account above a $600 balance, or with more than $600 of transactions in a year. So every American with a job could get looked over. A group of 41 industry groups recently warned congressional leaders that the plan “is not remotely targeted” to detect major tax avoidance.
It’s also a privacy breach waiting to happen. Not long ago the confidential tax records of Jeff Bezos, Mike Bloomberg and other wealthy Americans were exposed by ProPublica. Whoever leaked or hacked those records committed a crime, but the IRS has revealed nothing from its promised investigation.
Adding bank account info to the IRS trove would risk the disclosure of savings and spending information of political adversaries in the same way.
Twenty-three state treasurers and auditors signed a letter last month opposing the plan, calling it “one of the largest infringements of data privacy in our nation’s history.” Nebraska Treasurer John Murante says his state won’t comply if the reporting rule takes effect.
Casting a wide net over personal finances is a longstanding aim for Democrats and the political left. President Obama in 2009 formed a panel to discuss closing the “tax gap,” arguing that widespread underreporting of income costs the government hundreds of billions a year.
The House continues to debate the bank account proposal, but the spending bill already includes $80 billion for the IRS to hire thousands of new staffers. Treasury estimates that these changes would collect $700 billion in revenue over the coming decade.
But Rep. Kevin Brady, the top Republican on Ways and Means, points out that the tax gap is murkier than Democrats admit.
“The IRS will admit their data is seven years old,” Mr. Brady told CNBC in July, noting that the agency’s estimates don’t account for the 2017 federal tax reform that limited many loopholes. “What they’re saying is give us a ton of money, let’s hire a bunch of auditors and we think this will create revenue.”
Overestimating the results of greater enforcement lets the Biden Administration attach a higher revenue number to its multi-trillion-dollar spending proposal. That’s bad enough.
But the bigger threat of giving the IRS access to the details of your bank account is that politicians will eventually find a way to control how you save and spend your own money. This is a bad idea that deserves to die.
TaxBit Courts Corporate America With Crypto Accounting Software
BlockFi will be the first customer of TaxBit’s new “Corporate Accounting Suite.”
TaxBit has begun pitching corporate America on specialized crypto tax prep software in a sign of the growing business behind bitcoin and other digital assets.
The “Corporate Accounting Suite” already has its first customer, Aaron Jacob, a strategy executive at TaxBit told CoinDesk: BlockFi, the crypto lender and bitcoin exchange. He said banks, exchanges and investment firms are also in the crosshairs.
Expanding beyond retail and investigative clientele, the Draper, Utah-based company is betting that the next big wave of crypto-minded accountants will come from corporations, an area traditionally cautious about the $2.5 trillion asset class.
From a purely infrastructure-focused perspective, that hesitancy may soon become rarer. Earlier Monday, payments giant Mastercard said it would vastly expand its crypto capabilities as part of a push to get banks and merchants into cryptocurrency. Meanwhile, BlockFi is forming a new joint venture with investment firm Neuberger Berman.
“It’s much more complicated than transacting in fiat, because as you know, digital assets are not treated as cash,” Jacob said. “Even though we call it cryptocurrency, it’s really a crypto property from a tax perspective, and that’s also true from an accounting perspective as well.”
He said the software will help corporations keep tabs of their coins’ myriad movements. Exchanging coins, swapping, selling and bridging are all potential taxable events that a compliance-minded company needs to track.
“We’re helping enable companies to be able to expand their offerings to their consumers by opening up an entirely new universe of transactions and products and services that they can provide,” Jacob said.
Things To Know (And Fear) About New IRS Crypto Tax Reporting
The new law redefines “cash” to include “any digital representation of value” including cryptocurrency, but in an anonymous system, is this going to work?
The Infrastructure Investment and Jobs Act (H.R. 3684) put crypto in the crosshairs, where Congress and the Internal Revenue Service (IRS) hope to scoop up enormous tax dollars. This reporting regime is projected to rake in an astounding $28 billion over the next ten years.
No other provision in this massive recently enacted federal law is supposed to produce tax dollars that are even close. If you don’t think that means the IRS is coming for your crypto in a very big way and that Congress is trying hard to facilitate it, think again.
The crypto community was outraged when the measure was first proposed and tried to push back hard. That effort resulted in some narrowing, but the provisions were enacted anyway. Some people are still talking about a repeal effort, but that could prove to be a hard sell when $28 billion is on the line that the Biden administration may need.
As enacted, Form 1099 and other reporting rules don’t take effect until December 31, 2023. Even so, since Form 1099 reports are done in January for the prior year. That means 2023 will be a big tax year.
And with 2022 right around the corner and 2021 tax returns due soon thereafter, it’s a good time to get your tax affairs in order. Key new questions are whether you are a broker, and who is. And how will these sweeping onerous reporting rules be applied?
With potential civil and even criminal penalties, you can bet that most exchanges, and others who might be in doubt about whether they are brokers subject to the new law, may resolve any doubts in favor of reporting. Surprisingly, exactly what constitutes being engaged in a trade or business may be open questions too.
The crypto community was outraged when the measure was first proposed and tried to push back hard. That effort resulted in some narrowing, but the provisions were enacted anyway.
Some people are still talking about a repeal effort, but that could prove to be a hard sell when $28 billion is on the line that the Biden administration may need.
As enacted, Form 1099 and other reporting rules don’t take effect until December 31, 2023. Even so, since Form 1099 reports are done in January for the prior year. That means 2023 will be a big tax year.
And with 2022 right around the corner and 2021 tax returns due soon thereafter, it’s a good time to get your tax affairs in order. Key new questions are whether you are a broker, and who is. And how will these sweeping onerous reporting rules be applied?
With potential civil and even criminal penalties, you can bet that most exchanges, and others who might be in doubt about whether they are brokers subject to the new law, may resolve any doubts in favor of reporting. Surprisingly, exactly what constitutes being engaged in a trade or business may be open questions too.
If you do successive smaller withdrawals or payments to avoid the cash report, that is “structuring” your transactions to evade the rules, and it is itself a federal criminal offense.
Many people have been caught by this rule, trying to cover up some embarrassing but legal payments, and have unwittingly committed a crime, been convicted of a felony, fined and then jailed for up to five years.
Whether for structuring or for ignoring the rules, you don’t want to mess around with these cash reporting rules.
The bank, merchant or person in business must fill out the person’s full name, birth date, address, Social Security number and occupation.
And now, Congress and the IRS are requiring this form for crypto, too. As amended, the new law redefines “cash” to include “any digital representation of value” involving distributed ledger technology, such as blockchain. In an anonymous system, is this going to work?
Starting Jan. 1, 2024, a crypto transaction may trigger a Form 8300 filing when any “person” (including an individual, company, corporation, partnership, association, trust or estate) receives digital assets in the course of a trade or business with a value exceeding $10,000.
Valuation is done on the day of receipt, and as with all things crypto, valuation matters a lot. Again, structuring transactions into smaller receipts to avoid reporting is a felony.
And since receipts must be aggregated if they are related in a series of connected transactions, virtually any receipt of digital assets is potentially reportable, regardless of dollar value.
Of course, the IRS being interested in crypto is nothing new. Everyone is already required to report crypto gains to the IRS. There’s even a “do you crypto” question on every IRS Form 1040 or individual income tax return now.
It’s often compared to the “do you have a foreign bank account” question that appears on Schedule B, and that has led to many criminal convictions for the IRS, and big civil penalties.
The new requirements are sweeping. And although there is a grace period until Dec. 31, 2023, many changes will be needed to make them suitable and applicable.
The new law mandates that a recipient of more than $10,000 in crypto who is in business must collect, verify and report a sender’s personally identifiable information within 15 days. If you don’t, you can face fines and even criminal liability.
Saying that you are an investor and not in business might seem to be attractive if you have strong arguments on that point. However, there is an enormous body of tax law on that topic, with some discernible standards, and the stakes are big.
Will any of this be easy in what is often an anonymous peer-to-peer system? Probably not, but there will likely be fear about the new rules, and some degree of filing to be safe rather than sorry.
Can The IRS Be Trusted With Your Data?
A scathing report calls into question the agency’s ability to protect the sensitive information it collects.
Like many Americans, I tend to feel generous this time of year — not only because it’s the season for giving, but also for the tax implications. This year, however, my usual concerns about how many deductions I can claim on next year’s return have given way to worries about privacy.
In fiscal 2021, the Internal Revenue Service processed 269 million tax forms, each one rich with information that scammers and thieves would love to have. A scathing new report from the U.S. Treasury Department’s Inspector General for Tax Administration calls into question the ability of the IRS to protect this mass of data.
Ever since 1996, when what was then known as the General Accounting Office issued a stinging report about vulnerabilities in IRS computers, critics have questioned how well the agency protects all the data it collects.
In 2002, Congress adopted the Federal Information Security Modernization Act, or FISMA, which set forth standards all federal agencies were required to meet. How’s the IRS been doing with that? Here’s the IG report:
Until the IRS takes steps to improve its security program deficiencies and fully implement all security program components in compliance with FISMA requirements, taxpayer data could be vulnerable to inappropriate and undetected use, modification, or disclosure.
The wordsmith in me can’t leave unremarked upon the drafters’ clumsy effort to soften the harshness of this judgment. To be “vulnerable” is to be susceptible to harm; a vulnerable person is one who might easily suffer something bad. (Think, the unvaccinated.) Thus the phrase “could be vulnerable” is what my older brother used to call a double impositive. The taxpayer data either are vulnerable or not.
They are. Enormously.
Consider the Income Verification Express Service, known as IVES, which allows lenders to use IRS data to check income claims. Few of the companies that use the service have complied with security mandates. And the IRS itself has scarcely done better:
“We identified 8,754 tax transcripts that the IVES Program improperly issued for 4,726 taxpayers during Processing Year 2019” — all because either the software of the clerks didn’t take proper note that the file in question had been flagged for identity theft.
The report is full of similarly alarming nuggets, from improperly sanitized laptops and smartphones to insecure physical door locks, from inactive accounts with administrative access that nobody’s disabled to inaccurate equipment inventory in the department’s crime lab.
And there are bigger issues. For instance, the legacy systems have persistent vulnerabilities: “Configuration management compliance for Windows and Linux servers is not effective,” the report states flatly. It’s hardly reassuring that the explanation that follows, which occupies a good two pages, has been almost entirely redacted.
Oh, and just in case you’re wondering: “Vulnerabilities open past remediation time frames are not effectively documented and tracked.” In other words, the agency itself isn’t sure which vulnerabilities have been patched — or even which ones exist.
Remember the leak of confidential taxpayer information to ProPublica earlier this year? Whatever one’s politics, it’s easy to see it as a reason to worry, given that the IRS evidently either
(1) has no way to track down who handled the data in question, or
(2) allows access to private data to so many people that it’s impossible to tell who downloaded it. (And if it was an outside hack, well, that’s more worrisome still.)
But it’s not surprising. An August report from the Senate Committee on Homeland Security found cyberprotections throughout the federal government to be … well, the only word that comes to mind is atrocious.
For example, the Department of Transportation was unable to locate 7,231 mobile devices and — get ready for it — 4,824 servers.
Tests at the State Department “revealed 450 critical-risk and 736 high-risk outstanding vulnerabilities” and found thousands of active email accounts for former employees, including on the department’s classified networks.
At the Department of Education, investigators “successfully transmitted to an external email address a test file containing 200 credit card numbers in a format that should have been blocked according to the Department’s policy.”
By exploiting the same flaw, a real document containing thousands or tens of thousands of credit card numbers could have been stolen.
Seven of the eight departments surveyed were equally abysmal at cybersecurity.
If the federal government were a private corporation, trial lawyers would be having a field day. The fact that its agencies are protected by the principle of sovereign immunity is producing exactly the moral hazard problems scholars have long noted.
The issue is government-wide, so it is unfair to single out the IRS and its 81,000 employees. (My own admittedly rare interactions have been excellent.) And the unfortunate bipartisan erosion of the IRS budget over the past decade can hardly have helped it comply with security mandates.
Nor did the IG give the agency a failing grade at everything; some of departments seem to be securing data better than others. Moreover, there is some solace in the fact that the 2020 SolarWinds attack on multiple federal agencies apparently failed to gain access to data on individual taxpayers.
Having said that, it is fair to ask whether there might be a point to the widespread skepticism about such new IRS requirements as the one calling for banks to share ever more information about ever-smaller accounts. Maybe a government hungry for more private data should first meet its own standards for security.
NFT Investors Owe Billions In Taxes And IRS Sets Sights On Evaders
* Nonfungible Token Market Exploded To $44 Billion Last Year
* Uncle Sam Is Keen To Collect, But The Tax Rules Aren’t Clear
It’s one of the hottest corners of crypto — and now the U.S. government wants its share of the profits.
Investors and creators of nonfungible tokens — a market that has ballooned to $44 billion, Chainalysis data show, and attracted fans from Justin Bieber to Melania Trump — face billions of dollars in taxes and rates as high as 37%, according to tax experts. Internal Revenue Service officials who deal with tax evaders say they are gearing up for a crackdown.
The surprises looming for NFT enthusiasts when tax filing season begins this month are crypto’s latest wake-up call from Washington as officials across the U.S. government set their sights on the burgeoning industry.
The rules about taxing tokens aren’t clear, leaving NFT collectors scrambling to calculate how much they owe.
Investors may not realize they need to pay any taxes at all or that they should file more than once a year, increasing the odds they’ll face future penalties.
“You don’t get to not report gains or losses because the IRS has failed to provide guidance that meets your expectations,” said San Francisco-based tax attorney James Creech. “The harder it is for people to get to a reasonable — or ideally, a right — conclusion, the easier it is to ignore it.”
NFTs gained attention as representations of digital art and are expected to be a key part of the so-called metaverse that tech titans like Mark Zuckerberg say is the future of the Internet. The tokens are digital certificates of authenticity and can’t be replicated, which potentially increases their value.
Token sales skyrocketed last year, with NFTs such as CryptoPunk #3100 — which features an alien sporting a headband — selling for $7.7 million after an initial price of $2,000 in mid-2017. “Everydays: the First 5000 Days” from digital artist Mike Winkelmann, also known as Beeple, sold for an eye-popping $69.3 million.
Like so much in the crypto universe, it’s hard to compare tokens to more traditional investments and regulators including those at the IRS are grappling over how to police them.
When a creator sells an NFT on a platform like OpenSea or Rarible, most tax experts agree that the profits should be considered ordinary income and be subject to a rate as high as 37%. Investors who buy the tokens owe capital-gains taxes if they used another cryptocurrency for the purchase, and when they sell it.
Beyond that, the rules are murky. There are questions about whether tokens should be taxed like art “collectibles,” which comes with a long-term capital-gains rate of up to 28%.
That’s compared to 20% for most cryptocurrencies and stocks.
The infrastructure bill President Joe Biden signed into law last year will make it harder for people to hide digital assets, but the Treasury Department has not said whether that includes NFTs.
It’s hard to calculate exactly how much tax is owed, but experts such as Arthur Teller, chief operating officer at TokenTax, estimate the total NFT tax bill could run into the billions.
Some people aren’t aware they owe taxes quarterly and may already face penalties for just filing an annual return, said TokenTax’s co-founder, Zac McClure. Other people likely don’t know there are any reporting requirements, said Shehan Chandrasekera, head of tax strategy at CoinTracker.
With so much money at stake, the IRS will likely be forced to clarify the rules, but it may begin auditing people first, said Michael Desmond, the former chief counsel at the IRS who is now a partner at Gibson, Dunn & Crutcher.
IRS investigators are preparing for a possible surge in cases as soon as this year.
“We subsequently will probably see an influx of potential NFT type tax evasion, or other crypto-asset tax evasion cases coming through” said Jarod Koopman, acting executive director of cyber and forensic services at the IRS’s criminal investigation division.
Meantime, NFT aficionados should brace for a lot more paperwork.
“It’s an absolute nightmare,” said Adam Hollander, an NFT investor and creator of the “Hungry Wolves” collection, adding that he has spent 50 hours combing through months of transactions. “There are people who aren’t going to be willing to do what I’m doing.”
TaxBit To Offer Free Crypto Tax Forms With New Network
TaxBit wants to prevent crypto users from spending “thousands of dollars per year” to generate crypto tax forms.
Crypto tax compliance firm TaxBit is working to unite major industry companies like Coinbase and Binance.US within one network to enable free 2021 tax forms for users.
The crypto tax software provider on Tuesday launched the TaxBit Network, a group of companies aiming to democratize crypto tax calculations and tax forms by providing necessary tax reporting data to all network users for free.
The TaxBit Network at launch includes about 20 major crypto-related businesses in the United States, including firms like PayPal, Binance.US, Coinbase, FTX.US, Gemini, Celsius Network, Blockchain.com, Paxos, OkCoin and BlockFi.
The network will be adding new companies daily, TaxBit’s vice president of marketing Michelle O’Connor told Cointelegraph.
As part of the initiative, every user of the TaxBit network company will be able to receive free and accurate 2021 tax forms. Additionally, a number of participating platforms will be incorporating a quick TaxBit sign-up within their apps to simplify access to tax reporting tools.
“If a user has taxable transactions on platforms not part of the TaxBit Network, a cost will apply to retrieve tax forms from out-of-network platforms,” TaxBit noted.
The new development aims to eliminate barriers to mainstream crypto adoption by ensuring that crypto users in the U.S. are able to stay tax compliant without spending tons of money.
“Historically, the process of generating cryptocurrency tax forms cost individuals anywhere from hundreds to thousands of dollars per year depending on whether they used do-it-yourself software or enlisted an accountant,” the announcement notes.
“Our portfolio performance and tax optimization solutions empower year around decisioning versus that tax season-only mentality. With market volatility so prevalent, we provide the retail consumer with tax compliant solutions to optimize their holdings through tax-loss harvesting,” O’Connor stated.
Binance.US CEO Brian Shroder pointed out that the company’s participation in the TaxBit Network is a crucial step in their commitment to safety and compliance, particularly after President Joe Biden signed the infrastructure bill into law in November.
TaxBit is a major crypto-focused tax compliance firm that brings together tax attorneys and software developers to build software to simplify and automate the process of crypto tax reporting.
Backed by Winklevoss twins’ family office, TaxBit has seen notable growth recently, securing a $130 million raise at a $1.3 billion valuation in August 2021.
Crypto Tax Loophole Offers Escape Hatch For Battered Investors
* Selling For Loss Could Mean Future Tax Savings, Experts Say
* Digital Assets Currently Not Subject To ‘Wash Sale’ Rules
There may be a silver lining for crypto investors selling at huge losses during the recent market turmoil: a quirk in the tax code that lets people minimize what they’ll owe the government down the road.
Unlike stocks and bonds, cryptocurrencies aren’t subject to federal rules that bar people from claiming deductions if they sell an asset at a loss and then buy an identical or similar asset within 30 days before or after the sale.
That provides a unique opportunity for people suffering steep losses to sell and reap future tax savings, then buy more virtual tokens at cheaper prices, according to crypto tax filing software firms.
“This is a great time to store your capital losses, because when you exit the market at a future date at a huge gain, you can use these losses,” said Shehan Chandrasekera, head of tax strategy at software provider CoinTracker. Chandrasekera, who goes by @TheCryptoCPA on Twitter, has posted extensively about the strategy that he calls a “tax loss harvest.”
2/ When to tax loss harvest?
It’s a great time to TLH across crypto and stocks right now.
Markets are significantly down from ATH values.
— Shehan (@TheCryptoCPA) January 22, 2022
After surging 60% in 2021 — and touching an all time high of nearly $69,000 in November — Bitcoin has fallen 20% to under $37,000 this year. The impact of crypto’s January turmoil won’t show up on investor’s 2021 tax returns. However, thousands of crypto investors who piled into the asset class last year must account for those investments as they file their returns during the next few months.
Investors who sold crypto at a loss and then purchased similar assets at a lower price — a move that some refer to as wash sales — are free to take advantage of the tax strategy, according to TaxBit, a crypto tax software company. Some Democrats tried the close the loophole in a roughly $2 trillion spending bill that failed late last year.
“Our position at the company is: as it’s written now, wash sale rules are not in place,” said Michelle O’Connor, vice president of marketing at TaxBit. “So while they’re not in place, and the markets just getting tanked, get in, optimize, reset cost positions and take advantage of this legal tax strategy.”
O’Connor said that since the end of last week TaxBit has seen a big uptick in people using an online tool that helps customers take advantage of the losses. She also refers to the move as “tax-loss harvesting.”
Under the strategy, investors can use their losses to offset any gains in a given year. If they don’t have gain to offset, they can deduct up to $3,000 in losses from ordinary income. Any excess capital losses above that amount can be used to lower tax bills in subsequent years.
Coinbase Users Can Now Receive Tax Refunds In Crypto Through TurboTax
Both federal and state tax refunds can both be converted automatically into cryptocurrency.
Cryptocurrency exchange Coinbase (COIN) is giving users the option of receiving their tax refunds in crypto through TurboTax, the exchange said in a blog post Thursday.
* TurboTax’s website shows how users can get their refunds deposited directly into their Coinbase accounts. According to Coinbase’s blog post, customers can choose to get refunds deposited into one of over 100 cryptocurrencies, from stablecoins to yield-bearing assets.
* Both federal and state tax refunds can be converted automatically into cryptocurrency, according to the New York Times, which was the first to report on the new feature.
* Coinbase users could already get a discount on TurboTax products that support cryptocurrency, as well as use TurboTax’s CoinTracker to organize and file their taxes on crypto transactions for free or at a reduced rate for a large number of transactions.
* Coinbase is trying to make it easier for customers to integrate their finances with its crypto trading platform. In September it announced it was allowing its U.S. customers to deposit all or part of their paychecks in crypto or dollars without a fee.
* Recently, tax software firm TaxBit launched the TaxBit Network, a supported network of 20 crypto companies – including Coinbase, FTX.US, Binance.US, Gemini and SuperRare – that will allow clients of supported institutions to access crypto tax forms for 2021 at no charge.
US Crypto Tax Guide 2022
It’s getting to that time of year again when the IRS is looking for its pound of flesh from crypto investors.
Any U.S. citizen that dabbled in cryptocurrency over the 2021 tax year will now be expected to file a tax return to the IRS. Taxpayers can file their taxes between Jan. 24 and the April 18 deadline, with penalties issued for submissions made beyond the deadline.
Cryptocurrencies, including non-fungible tokens (NFTs), continue to be treated as “property” for the purposes of tax in the United States.
This was originally decided by the IRS in a notice published in 2014 and means that a majority of taxable actions involving digital assets will incur capital gains tax treatment, similar to how stocks are taxed. Cryptocurrencies received from select activities, however, are treated as income and therefore subject to income tax treatment.
This guidance around taxable events has become murky over the last year, largely due to new activities related to decentralized finance (DeFi).
When Do U.S. Citizens Have To Pay Tax On Crypto?
Capital Gains Tax Events Involving Cryptocurrencies Include:
* Selling Cryptocurrency For Fiat (U.S. Dollar, Japanese Yen, Etc.).
* Sending Cryptocurrency As A Gift (Anything Over $15,000 For The 2021 Tax Year).
* Purchasing Goods And Services With Cryptocurrency, Even Small Purchases Like Buying A Coffee.
* Trading Or Swapping One Digital Asset For Another. This Includes Purchasing Nfts Using Cryptocurrencies.
It’s worth noting you only owe tax on any capital gains you make from these events, not the full amount of disposed assets. This is calculated as the difference between the price paid for the asset and the price it was sold at.
The IRS has also not yet provided clarity on whether minting tokens – including creating wrapped tokens, publicly minting NFTs or minting interest-bearing assets – creates a taxable event or not. Nor is it clear at this stage whether depositing of withdrawing liquidity from DeFi liquidity pools using liquidity provider (LP) tokens is considered a crypto-crypto transaction.
Professional guidance should be sought if you’ve dealt with any of these assets or processes over the last tax year.
Income Tax Events Include:
* Receiving Cryptocurrency From An Airdrop.
* Any Crypto Interest Earnings From Defi Lending.
* Crypto Mining Income From Block Rewards And Transaction Fees.
* Crypto Earned From Liquidity Pools And Interest-Bearing Accounts.
* Receiving Cryptocurrency As A Means Of Payment For Carrying Out Work, Including Bug Bounties.
Interestingly, the tax laws surrounding crypto earned via staking remain unclear. For the most part, many report it as a mining income. However, there’s an ongoing case against the IRS for staking rewards to be taxed only when they’re sold – not when they’re earned.
The argument put forward by the plaintiffs in the case asserts newly created property, such as furniture or other manufactured goods, is usually taxable only at the point of sale. They believe this same principle should be applied to newly minted tokens received from staking.
Losses incurred from trading can be used to offset your capital gains as well as deduct up to $3,000 off your normal income tax depending on how long you’ve held the assets for (see below). Any additional losses can be carried forward to the next tax year.
You do, however, have to show a loss across all assets in a particular class to qualify for a capital gains reduction.
How Much U.S. Crypto Tax Do You Pay?
Calculating how much cryptocurrency tax you owe in the U.S. is based on how long you’ve held the assets prior to disposing of them, as well as which income tax bracket you fall under.
This Is Divided Into Two Parts:
Short-term capital gains: Profits from a crypto asset held less than a year are taxed at the same rate as whichever income tax bracket you’re in. Any losses can be used to offset income tax by a maximum of $3,000. Any further losses can be carried forward.
Long-term capital gains: For crypto assets held for longer than one year, the capital gains tax is much lower; 0%, 15% or 20% tax depending on individual or combined marital income.
How To Prepare For The U.S. Crypto Tax Season
Preparing and filing your crypto taxes can be an arduous process, particularly if you’ve never done it before. The first step is the most important and the most time-consuming part of the filing process – collating all of your crypto activity.
For some, this might only involve logging one or two trades. But for more experienced investors who have dabbled in NFTs, yield farming, airdrops and other types of crypto trading, it can be a monumental task. That’s why it’s usually advisable to keep track of your trades as you go along throughout the tax year to prevent having to do it all in one go.
Once you’ve completed the first step, you’ll then need to calculate any capital gains and losses. There are a number of platforms that can take care of this for you, some of which offer free trials and may provide all you need to complete this next step.
From there, you’ll need to fill in Form 8949 and add it to Form Schedule D. Any crypto assets earned as income need to be added to Schedule 1 Form 1040, and self-employed earnings from crypto need to be added to Schedule C.
Finally, submit your forms and pay whatever amount of tax you owe before the deadline.
Canada Crypto Tax Guide 2022
Like many jurisdictions, crypto assets are treated as “property” in Canada, meaning investors will owe taxes to the Canadian Revenue Agency (CRA) in certain situations. This piece is part of CoinDesk’s Tax Week.
For Canadian citizens who cashed out any of their crypto assets over 2021, the time to start preparing for crypto taxes is fast approaching. Tax returns can be filed as early as Feb. 28 all the way up to the filing deadline of April 30.
While the filing process is generally quite straightforward for things like traditional employment, it gets much trickier when cryptocurrencies are involved – and yes, you are required to pay taxes on crypto in Canada.
The Senate reviewed crypto tax information in 2014 and recommended Canada’s leading body for taxes, the Canada Revenue Agency (CRA) issue guidance on how this new form of currency should be treated in the country.
When Do Canada Citizens Have To Pay Crypto Taxes?
Under the guidance produced by the CRA, taxable events occur upon the disposition of any cryptocurrency. Disposition is the CRA’s term for “giving, selling or transferring” something, which in this case is a crypto asset. In general, common crypto dispositions that would be considered as taxable events include:
* Paying For Goods And Services Using Cryptocurrency.
* Selling Crypto Assets
* Trading One Cryptocurrency For Another (Including Swaps, Exchanges And Peer-To-Peer Trades)
* Cashing Out Cryptocurrencies Into Fiat Currency
* Gifting Crypto Assets To Friends, Family Or Work Colleagues
This definition only views crypto transactions as taxable events, and there are no tax requirements for simply holding crypto. In short, the Income Tax Act holds that any bartered transactions, like the disposition of cryptocurrencies, will have income tax implications.
The CRA treats cryptocurrency as a commodity under the Income Tax Act. Under this definition, crypto transactions can be treated as either business income or capital gain, depending on the type of transaction.
Taxable business income is crypto income earned as part of a business operation. Determining whether income is business income is determined on a case-to-case basis. However, some common signs of business income include:
* Promoting A Product Or Service
* Commercial Activities That Are Done In A “Viable Way”
* Intent To Make A Profit, Irrespective Of Whether You’ll Likely To Do So In The Near Future Or Not.
* Acting Like A Business, Such As Preparing A Business Plan And Acquiring Inventory.
Although business activities can be seen as regularly occurring, sometimes a single transaction can constitute business income. Because it’s a case-by-case basis, the CRA will typically look at the “adventure or concern in the nature of the trade.” While this sounds complex in practice, it can actually be more straightforward. In determining whether you are acting as a cryptocurrency business, the CRA has provided further guidance on specific transactions and some common examples of crypto businesses including:
* Running A Cryptocurrency Exchange
* Crypto Mining Operations
If the disposition of a cryptocurrency does not constitute business income and it sells for more than the purchase price, then the CRA considers the taxpayer to have realized a capital gain. Capital gains are considered income for your tax year, but only half of realized capital gains are subject to the capital gains tax (“taxable capital gains”).
How Much Crypto Tax Do You Pay In Canada?
Your capital gains taxes are determined by what is called the inclusion rate (IR), which is made up of taxable capital gains and allowable capital losses. IR has changed on multiple occasions but is currently at 50% of your total IR (taxable capital gains – allowable capital losses).
Generally, different provinces in Canada will have different rates for income tax. Lower rates are typically reserved for income eligible for the federal small business deduction. While provinces can typically set whatever the maximum business limit is for this income, most use the federal business limit as a guide. Any business income above the business limit is required to pay the higher rate. The rate table is as follows:
India Crypto Tax Guide 2022
Indian crypto investors will have to start paying tax now that the government has made the rules clear through legislation expected to be formalized in a few weeks. This piece is part of CoinDesk’s Tax Week.
Just the thought of paying tax on crypto transactions has generated creative memes in popular Indian digital culture. We get it! It’s not easy. The government’s proposal, which lays down how much crypto tax is to be paid, can give anyone a headache. It may be tweaked before it is finalized in March, but for the moment here is what it looks like.
Tax season starts on April 1, 2022. Indian Finance Minister Nirmala Sitharaman announced the proposals in her budget speech on Feb 1, declaring cryptocurrencies, non-fungible tokens (NFT) and any other crypto asset are, under a broad definition, “virtual digital assets.” This means crypto-assets and NFTs are subject to capital gains tax, similar to stocks in the equity market.
When Do Indian Citizens Have To Pay Tax On Crypto?
The date to file taxes for the year 2020-2021 has been extended three times and is now due on March 15, 2022.
For taxes to be filed for the year 2021-2022, April 1, 2022, is when one can technically start the process of calculating or filing returns but the last date for individuals is July 31, 2022. It’s worth noting that this date is often extended by the government.
For individuals and businesses required to undergo tax audit, the last date for filing tax returns for the financial year 2021-2022 is Oct. 31, 2022. The last date for filing tax returns for the financial year 2020-2021 has already passed (Feb. 15, 2022) for the following taxpayers:
* A Company
* A Person Other Than A Company Whose Accounts Are Required To Be Audited Under The Income Tax Act (ITA) Or Any Other Law
* A Partner Of A Firm Whose Accounts Are Required To Be Audited Under The ITA Or Any Other Law Or The Spouse Of Such A Partner (In Certain Cases)
* Filing Of An Audit Report By Taxpayer Required To File An Accountant’s Report Under Section 92E.
* Filing Of Accountant’s Report Under Section 92E.
The Finance Minister also said that “to provide an opportunity to correct an error, taxpayers can now file an updated return within two years from the relevant assessment year,” framing the move “as an affirmative step towards voluntary compliance.”
This step can also be construed as a signal to crypto investors to disclose gains and pay taxes on them from the last two years.
Tax lawyers say crypto users should pay their taxes from whenever they started making gains on their digital assets, irrespective of which year it was.
“The government can technically haul up a crypto dabbler for not paying taxes on gains from at least up to the last five or six years,” said Rajat Mittal, a tax lawyer.
It is advisable that if there are undeclared gains from the past years they should be declared in the returns for the period ending March 31, 2022.
How Much Crypto Tax Do You Pay In India?
The Indian Government Has Set Out A Number Of Requirements For Taxpayers In The Legislation, Including
* 30% Tax On Capital Gains Or Profit From Cryptocurrencies, NFTs Or Mining
This 30% tax on profit takes into account a 1% TDS (tax deduction at source) deposited by the facilitator/exchanges/person responsible for paying the consideration on every crypto transaction that can be calculated from July 1, 2022, onwards.
* 30% Tax On Gifts
The catch here is that gifts from immediate relatives are exempt but gifts from friends are not.
How To Prepare For Crypto Tax Season In India
* Start with a clean slate. This means calculating all crypto gains of every virtual digital asset you’ve owned since before April 2022.
* Maintain a record of the India Rupee (INR) value of cryptocurrencies at the time of sale (for example between bitcoin and ether) because you will pay your taxes in fiat currency and not cryptocurrencies. This is imperative because the value of cryptocurrencies constantly fluctuate.
* If you are doing a peer-to-peer trade without using an exchange then you need to have a tax deduction account number (TAN) for tax deducted at source (TDS). These TDS returns have to be filed on a quarterly basis.
* Individuals having profits on virtual digital assets have to file returns by filing the form known as Income Tax Return 1, 2, 3 or 4, as applicable.
* Businesses have to file returns by filing the form known as Income Tax Return 5 or 6, as applicable.
* Source for tax return forms applicability
All of these details must be compiled in an income tax return to be submitted to the income tax department. For all questions regarding taxation on crypto, the government has provided a memorandum explaining the provisions in the finance bill that can be accessed here.
The Automatic Tax Man Cometh
Crypto won’t save you from taxes, but it may eventually make them easier to pay, says futurist Dan Jeffries. This piece is part of CoinDesk’s Tax Week.
I’ve never been a tax activist. I’ve always taken the “give to Caesar what is Caesar’s” approach to my tax burden.
I’m not very religious either, but I always loved that line from the Bible. Jesus used it to deftly deflect some antagonists who were trying to trip him up and trap him. They hoped he’d tell people not to pay taxes so they could paint him as a revolutionary and insurrectionist and get him arrested. But he wasn’t biting. His reply was simple, just pay your dues in the material world too.
But there are a lot of tax activists in crypto. You can spot them in any Reddit, Twitter, Telegram or Discord thread where they angrily swear the government will need to pry money from their cold dead hands. What’s a tax activist? That’s someone who thinks taxes are unconstitutional or wrong and refuses to pay.
To many tax activists, crypto is the great white hope, that will bring the dawn of a bright new day of self-sovereignty, where people seize back control of their money from the state and nobody can force them to pay a single sat (a unit of bitcoin) that they don’t want to pay.
There’s just one problem.
Crypto will make paying taxes a whole lot easier in the future.
To understand why, you just have to understand a little bit about how technology changes over time as it gets more widely adopted.
Taxes And Crypto: Diverging From Satoshi’s Vision
To see where crypto is going, you have to know where it started, and it started as a decidedly libertarian movement.
A quick read through Satoshi Nakamoto’s writing from his forum posts and the original Bitcoin whitepaper gives you a lens into Satoshi’s mind, and that mind favored hard money and privacy. It’s all right there in Satoshi’s posts to Bitcoin forum:
“Privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone.”
Above all, Satoshi wanted us to return to self-sovereignty. It’s baked into the design of the system. Instead of storing crypto in a bank or with a centralized power, and “[having] to trust [banks] with our privacy,” crypto gets stored in our wallets, governed by our private keys. Control your keys and you control your destiny. If you’ve got your keys nobody can force you to give up your money or seize it without a lot of effort.
But while crypto may have started as a libertarian movement, it won’t end there. Both crypto and how we pay taxes will change radically over the next 20 years, as digital money becomes the dominant standard for money across the world.
If you’re a Bitcoin maximalist or a hard-money adherent, you probably think it’s inevitable that Satoshi’s vision will win in the long run. We’ll have a powerful, limited money supply that can’t be debased and where privacy reigns supreme.
Whenever people look at technology they tend to see what they want to see, and what they want to see is their own beliefs reflected back to them and confirmed. We think because crypto was started by libertarians and, because we’re libertarians, then crypto will continue to evolve along libertarian lines.
Unfortunately, that’s just not the way a complex system evolves over time. When you’re peering into the misty haze of the future and trying to see where it’s all going, you’re better off thinking of technology as bright blue paint continually flowing into a river.
Imagine that brilliant blue spreading out and rippling, going wildly in every direction as it interacts with the stream of water and time.
The biggest thing that changes technologies is other ideologies getting their hands on it. While other groups may originally fear a new idea that came from a rival ideology, humans are an incredibly adaptive bunch. They absorb and change every technology they come into contact with, warping and changing it to fit their perspective.
Centralized powerhouses will look to force the decentralized nodes back through centralized choke points. It’s already happening with the rise of central bank digital currencies (CBDCs) with every major government on earth hard at work on one right now. Governments will look to get it under control with laws and force.
Tax agencies want to track and tax it, so no revenue escapes. Authoritarians will look to turn it into a panopticon that they can use to watch and trace people through, a one way mirror that lets them watch you without you knowing when they’re watching.
We’ve never had a system where the original vision matched how a technology evolved over time. Look at something like the internet, which was built for researchers in universities and for militaries to keep messages alive with routing if the nodes got destroyed by nuclear weapons. Now we use it to watch people dancing on TikTok, scream at each other on social media, watch porn, trade recipes, stream movies and play games.
Think of public key cryptography itself. It started as research in the U.K. and U.S. military as a way to control secrets, but once it got released publicly, it powered everything from private messengers to cryptocurrency, something no military ever imagined.
Once tech starts to interact with complex systems, it changes in complex ways.
Satoshi probably never imagined central bank digital currencies, but they’re coming like a lightning strike now. It’s no longer theoretical: Governments are hiring people, studying how to make it reality and testing the technology. China is already racing to deliver a fully digital money system so they can kill off cash.
Killing cash will give them total visibility into everything people spend their money on at all times. When you think of how often you spend money every day, that’s a lot of insights into your behavior and who you are as a person.
And just like that we’ve gone from an original vision of privacy and anonymity to a panopticon with the exact same technology.
What that means for taxes isn’t all that hard to see.
Over the next 20 years taxes will be nothing but a script.
Whenever you buy anything or get paid in CBDCs, you’ll get taxed immediately. In 25 or 30 years, taxes will get whisked out with every transaction. You’ll buy a lamp at the store or call a self-driving taxi to pick you up, and sales tax will go right to the tax man. The taxi company won’t file their income later and send the money on a delay. It will happen instantly and automatically.
That’s because it won’t take long for governments to figure out that the key super power of digital currencies is their programmability. Bitcoin and the cryptocurrencies that followed ushered in the era of programmable money. Programmability is the killer feature of digital money. That’s why it’s inevitable that it kill off dumb, analog money.
You can’t program a dollar bill to do anything at all. You can fold it and carry it with you and give it to someone else, but you can’t do much else with it. A digital dollar will have all manner of scripts and functions and possibilities baked right into it. You won’t need an escrow company when you buy a house, your eUSD or eEURO will just self-escrow.
By the time you go to report your taxes, most of them will already be paid. You’ll get a report that tells you what you paid and whether you want to dispute it. If you’re a regular worker with a fixed paycheck, that’s not all that different from today. Taxes already come out of your salary.
But if you’re a business owner, a proud owner of a side hustle, a consultant, an artist or a trader, it will mean profound change. You won’t put your tax money in a separate account and pay it later or quarterly. You’ll pay right now.
That will have massive implications for the state, which will only keep getting bigger. It will also directly impact your bottom line. You’ll no longer be able to earn any interest on that money in a bank or in investments while you wait to pay at the designated time.
Instead you’ll hand it over, and if you’re charged incorrectly, it means you have to wait to get it back through whatever the dispute process of the future looks like, and that means you just gave an interest free loan to the government.
Maybe you’re imagining that private cryptos will save you from automatic tax collection? Don’t bet on it.
Open, private crypto will likely evolve as a parallel economic operating system of the world, existing alongside central bank digital currencies over the next few decades. But even if you’ve got control of your own personal keys, it won’t be hard to subvert that with laws.
It won’t take much planning for tax agencies and lawmakers to realize they can just mandate automatic tax collection on any business that has employees above a certain level or on any retail sales. They’ll force companies to have a public, auditable wallet, linked to an identity, that they can study with chain analysis. The power to do this is built into every single crypto that exists today. It’s nothing but a simple smart contract. When X gets purchased, Y goes to this address in addition to the business address Z.
No matter how you cut it, we’re looking at a tax future that’s almost all automatic.
That’s not the worst thing in the world. Taxes are a complex mess, and if you’ve got passive income, investments, a business and a side hustle or all of the above, they’re virtually impossible to do without a smart and savvy accountant.
If you’re a big business, you need to employ a small army of accountants and tax lawyers to get it all set up and keep it running smoothly. Scriptable, automatic taxes will likely streamline a lot of that regulatory and compliance burden and keep filing taxes simpler.
But if you’re an original crypto libertarian and a tax activist, it might all come as a big shock. If you imagined bitcoin, monero, zcash and other cryptos ushering in a bold new era of tax havens, anonymous money and sovereignty, you’re probably going to wake up in a tomorrow you never expected and didn’t want.
Technology is an unpredictable animal. If you’re an engineer or a programmer, you may have wonderful dreams of tomorrow’s technology and where it’s all going and how it will change the world.
Technology does change the world, just not always the way we expect.
The people who started the early internet companies were often free-thinking dreamers who unleashed an “information wants to be free” revolution. They imagined open dialogue would break down authoritarian regimes and unleash a brave new world of openness and freedom.
Unfortunately, authoritarian regimes are doing just fine. They’ve figured out how to build national firewalls with man-in-the-middle attacks and how to employ armies of censors to attack free speech with a vengeance.
We did end up with vast open dialogues, but much of that dialogue turned poisonous because the original dreamers of the internet didn’t account for how many angry and ignorant people there were in the world, and those people get to use that open forum to drown us all out.
Of course, information did break free and now you can read or learn anything you want on the web, and that’s a small miracle. Higher education is available at the click of a button, and the most motivated among us can get smart on anything they want to study.
But while information may want to be free, storing all that info costs a lot of money, people, energy, bandwidth, servers and software, and someone’s got to pay for it. We pay for it with a surveillance economy that tracks whatever we say and do so it can sell us more ads.
Cryptocurrency will change the world too. It’s already doing it. The crypto world is valued at trillions of dollars, and people are building all kinds of future technologies on top of it, like decentralized messengers and identity systems, along Web 3 and non-fungible token (NFT) marketplaces that will bring real value to people across the planet over the next decade.
Self-escrowing, programmable money will streamline everything from buying houses and cars to creating self-executing wills that pay out automatically over time after a person dies.
But if you’re an original crypto enthusiast who comes from the early Wild West days when crypto was too complex for governments, central banks and corporate behemoths to understand, then you probably won’t recognize what crypto becomes over the next few decades.
When all your taxes are collected automatically, physical cash is illegal, and everyone is using fiat digital central bank coins in one way or another (even if they are also using decentralized, private coins, too) will it still be what you wanted?
If you’re a coin designer, you should be thinking about all the ways other ideologies can change and warp your philosophy. How can they exploit and change it? How can you prevent it? Can you prevent it at all? How? Can you build those protections in right now?
Only time will tell if there’s some kid out there with a whiteboard who’s figured out how to pull in some barely known branch of cryptography, the way zk-SNARKS got pulled into Zcash, to change the course of the future.
Maybe someone out there will find some obscure mathematical theory, applied in a way nobody imagined, to deliver the crypto utopia of privacy and self-sovereignty that makes it impossible for big business and intervention zealous governments to warp it into something unrecognizable. But for now, it’s not looking like it.
The Biggest Lesson The Future Of Tax Collection Will Have For All Early Crypto Pioneers Is Likely To Be A Simple One:
Be careful what you wish for.
How To Avoid Getting Rekt By Crypto Taxes
Tax guidance lags innovation. So does tax software. Meanwhile, misconceptions abound. If not careful, investors can end up owing more tax than expected and having to unload crypto to pay the bill. This piece is part of CoinDesk’s Tax Week.
Getting rekt is bad. Getting tax-rekt adds insult to injury.
Cryptocurrency investing is challenging enough on its own. The degen objective is to avoid suffering losses from hacks and rug pulls in the process of reaping oversized decentralized finance (DeFi) returns. There’s no greater thrill than stuffing your bags from the numerous ways you can monetize in crypto such as airdrops, staking rewards and yield farming.
However, The Tax Impacts Of The Good, The Bad And The Ugly Events Are Often Overlooked, For Three Main Reasons:
* Modular ”lego” money results in new types of transactions and events in crypto with no legacy comparison so there tends to be a regulatory lag before the guidance catches up. More crypto tax guidance is needed in the U.S. and around the world. For example, the treatment of non-fungible tokens (NFT), airdrops, wrapped tokens, staking, casualty losses, liquidity positions and impermanent loss are still question marks to varying degrees. Tax brain-teasers are not just about whether an event is taxable but, rather, the character and timing of the income coupled with readily identifying fair market value.
* Crypto tax software providers are also playing catch-up, trying to roll out features fast enough to keep pace with all the innovation. Just consider the sheer number of blockchains getting traction multiplied by all the decentralized exchanges (DEX), NFT marketplaces, bridges, layer 2 networks and so on. Crypto is no longer a game of calculating capital gains and losses from a static portfolio. Even though crypto tax software has made huge strides in the past eight years, including enterprise-grade versions, there are plenty of taxpayer use cases from individuals to businesses, with no one-stop solutions. This means degens who are on every chain and every DeFi platform are left with no software options. How are you supposed to manage taxes when you have no tools to do it?
* Finally, taxpayers lead themselves down a false path from the crypto tax “telephone game” where small misconceptions about crypto tax get magnified. In addition, many people fail to understand tax basics and ask the right questions, or choose to deal with it later. Twitter, crypto conferences and news outlets can spread information like wildfires. The recent Internal Revenue Service staking refund offer in the Jarrett case garnered headlines like “huge win” and “staking is now tax-free,” as if there will never be a tax. There are multiple definitions and types of staking, and that kind of chatter could lead people to believe all staking is tax free. It’s not.
The combination of a lack of guidance, the crypto tax software lag and misconceptions about crypto taxation explains how degens and noobs alike get tax-rekt. These are the ingredients for a surprise tax liability. The insult to injury is having to sell crypto assets in a bear market to pay the tax bill.
What Does Getting Tax-Rekt Look Like For Crypto Holders?
Let’s start with a nice airdrop example where Bob HODLs and stakes 120,000 AAA coins. He finds a Twitter post announcing an airdrop of BBB coins to AAA token holders. Bob loves airdrops so he claims 80,000 BBB after completing a few tasks including an on-chain voting proposal. Bob exercised dominion and control of BBB when its value was $1.25 so he has ordinary income of $100,000.
The BBB project is offering 110% staking rewards for the first year with reduced percentages thereafter. Of course, Bob jumps on those delicious returns and stakes his entire 80,000 BBB to fatten his bags.
For simplicity’s sake, let’s assume Bob is in the 37% federal tax bracket and a state with 3% tax for a 40% total tax. His potential liability from the airdrop is $40,000, but he did not set aside a tax reserve because he has dollar signs in his eyes and wasn’t thinking about it. The BBB token price trended up for the next five months until the market fell into a heavy bear slide over the next two weeks.
Meanwhile, the BBB token price got smashed, dropping 65% when some token holders got their unvested tokens and took profits. Bob’s $100,000 airdrop is now worth $35,000 and he owes tax of $40,000.
He finally consulted with a certified public accountant (CPA), realized he’s getting tax-rekt and decided to cut his losses, unstake and sell. Bob freaks out when he goes to unstake on Dec. 9, 2021, and discovers a 30-day unbonding period. (What, did you think this would be as easy as withdrawing cash from an ATM?)
By the time Jan. 8, 2022, rolls around and Bob’s stash gets unlocked his BBB is now worth $22,000 or $0.22 per token. He painfully sells the BBB for $22,000 right away and takes a tax loss of $78,000 ($22,000 proceeds minus the original basis of $100,000 from the airdrop).
It’s possible the tax loss could have helped offset the $100,000 of airdrop income, but the big tax loss took place in 2022 and it can’t be used for his 2021 return.
So Bob has to sell another of his precious cryptos to come up with the $18,000 shortfall ($40,000 estimated tax liability minus $22,000 in proceeds) This cascades into another crypto tax conundrum continuing the downward spiral as Bob continues to get tax-rekt.
Thus far only the original airdrop has been considered so it ain’t over yet. Remember, Bob was staking, claiming and restaking BBB rewards at 110% for six months (five months plus the 30-day unbonding period).
Bob’s uncompounded rewards would have been 44,000 BBB but based on his compounding frequency he actually claimed 72,000 BBB. While BBB was trending up for five months the average price was $2.80, resulting in another round of ordinary income of $210,600 (yikes).
The actual calculation for total ordinary income from taking rewards would be the sum of each token claim times the fair market value at the time of the claim. Bob’s 72,000 BBB staking rewards are now worth $15,840 using the same $0.22 token price above.
He sells this tranche of BBB as part of the same transaction and timing as above, resulting in another huge tax loss of $194,760 ending up in 2022 rather than being available to offset income from 2021.
This is the definition of rubbing salt in a wound: getting more tax-rekt from the staking part of the scenario that the original airdrop and selling crypto incurring even more gains to pay for more tax.
How Not To Be Like Bob
The most prudent approach to avoid Bob’s situation is to use the highest marginal rate for federal and state taxes for individuals, including individuals with pass-through entity income.
This estimate would be 40% to 50% (and for C corporations, 21% plus the state tax rate).
Suppose Alice got the same BBB airdrop as Bob. To avoid his fate, she would have sold 50% of her airdrop for a stablecoin pegged to the U.S. dollar at the time of receipt. For each subsequent staking rewards claim, she would do the same thing and sell 50% for a USD stablecoin, then compound and restake the 60% of BBB.
Alice hedges her tax liability to avoid getting tax-rekt and confines her risk to getting rekt on the remaining portion of BBB she keeps in play. She will suffer injury if BBB goes down the toilet but not the insult because she reserved assets for taxes.
This example is the most cautious approach. However, depending on your risk appetite, there is a range of strategies between Alice’s ultraconservative one and the devil-may-care approach that caused Bob’s troubles.
Stablecoins can be redeployed into lucrative liquidity provider (LP) pairs, thus maximizing crypto asset returns while simultaneously hedging tax liability. For example, a DEX may offer a BBB/USDC LP pair for 92% returns.
The strategy can be as simple as claiming BBB, selling 50% for USDC then re-staking both assets in a BBB/USDC pair for those nice returns. Since most LP pools are 50/50 pools, the 50% BBB and 50% USDC for the tax hedge is a perfect match.
* Keep up with crypto tax guidance and developments, because you have to consider a tax position even without guidance.
* Track your crypto using crypto tax software and document in parallel to capture those use cases without a tooling solution.
* Don’t get sucked in the crypto “telephone game” chatter as the basis for your own tax treatment.
* Use all the tools and tricks in your DeFi toolbox to your advantage and map out a better tax strategy based on your experience in order to stuff your bags and avoid getting tax-rekt.
Crypto Tax Prep Business Booms As Trading Surges And IRS Tightens Screws
Startups that help Americans calculate their crypto taxes have been raising hundreds of millions, hitting unicorn valuations. Even traditional tax-prep firms are rolling out crypto services.
Crypto tax preparation is big business in the U.S. as cryptocurrency investing has mushroomed into a $1.9 trillion global market.
Startups that help Americans calculate their crypto gains and resulting tax bills have been raising hundreds of millions and achieving billion-dollar valuations. Even traditional tax-prep services have been rolling out offerings for this blooming niche.
And perhaps not a moment too soon, with valuations near last year’s all-time highs, a proliferation of novel ways to profit on digital assets and the IRS on the hunt for crypto tax cheats.
It’s hard to gauge the size of this niche. “If I were to put out an estimate, I’d estimate that the U.S. crypto tax prep market is currently worth $400 million, but that number is growing exponentially year-over-year as regulators clamp down.” said David Kemmerer, co-founder and CEO of CryptoTrader.Tax.
The IRS started looking into cryptocurrency closely in the summer of 2019, when it sent thousands of letters to taxpayers whom the agency suspected of not reporting their crypto-related taxes properly.
“What I’ve seen in the past few years was consumers started to realize they have to pay taxes, but it was so overwhelming that they just ignored it,” said Michelle O’Connor, vice president of marketing at TaxBit. But then they started receiving “scary IRS letters.”
In October 2019, the IRS published its first detailed guidance on how taxpayers should declare crypto-related income. The same year, the agency included a question about cryptocurrency transactions in the Schedule A of individual 1040 forms. In 2020, the question became obligatory for all U.S. taxpayers.
Investors are getting the message, tax pros say.
“We will see the highest compliance rates among consumers and enterprises filing their crypto taxes for 2021 and expect to see the compliance rates grow exponentially year-on-year moving forward,” said Dan Hannum, chief operating officer of ZenLedger.
Down the road, technology will become increasingly complex, with decentralized finance (DeFi) and non-fungible tokens (NFTs) gaining adoption, and with the taxman looking over their shoulders, more people will need help managing their tax liabilities.
The IRS differentiates between various kinds of transactions, so cryptocurrency accounting might be tricky, and the safest way for consumers often appears to be asking for professional help – or using specialized software.
Hard To Measure
Estimates of the crypto tax prep market’s size vary.
“We believe that due to the massive uptake in crypto last year especially, that the crypto user base could be sitting close to 16% of the U.S. population, bringing us to 53 million potential crypto taxpayers,” said Robin Singh, founder of Koinly, citing last year’s Pew Research report about crypto adoption in the U.S.
Mark Steber, chief tax officer at Jackson Hewitt, the country’s second-largest tax prep firm with storefront offices nationwide, cited a more modest estimate by the consulting firm Chappuis Halder: about 15.3 million account holders, or about 9% of taxpayers in the U.S., and 35 million to 68 million globally.
The available official numbers are not that impressive, points out Shehan Chandrasekera, head of strategy at CoinTracker: the IRS has so far released stats for the 2019 tax season, and according to the report, only about 928,000 taxpayers said they did crypto transactions during the 2019 fiscal year (fresher data is not available yet).
However, this is likely to change.
“Based on trends and market insights, we believe at least half of the U.S. tax-filing population (~75 million) has something to do with crypto,” Chandrasekera said.
“Some may have taxable transactions where they have to file forms with the IRS. Some may be HODLers with no reporting requirement until they sell assets,” he added, using crypto slang for long-term holders.
The tax-prep companies wouldn’t share their client numbers. But they’ve been attracting significant investment.
Last August, TaxBit, which calculates crypto taxes both for consumers and the IRS, raised $300 million in a Series B round at a $1.33 billion valuation.
CoinTracker raised $100 million in January and is now valued at $1.3 billion. The company also announced an exclusive deal with Coinbase to help the Nasdaq-listed exchange’s users to properly report their crypto taxes.
Koinly, another firm in this category, is “seeing a significant uptick in our user numbers,” said Singh. The reason underscores the relative immaturity of the crypto industry.
The uptick “is fueled by the 1099 forms that exchanges are sending out to their users,” Singh said. “These forms are completely inaccurate in most cases since crypto traders have a number of wallets and exchange accounts, and no one exchange can produce an accurate report of the entire crypto activity.”
This problem is also what led two years ago to the “scary IRS letters” O’Connor mentioned. Cryptocurrency exchanges sent generated tax reports for their users, but those forms turned out to be incorrect, she said: Data about users’ transactions and gains was not balanced by the information on their initial purchases, making the IRS think they underreported their taxes.
Niches Within Niches
In this vast market, companies are picking different spots. Some catered to retail consumers first, some focused on enterprises and others also chose to provide technology to regulators.
TaxBit is concentrating on catering to crypto enterprises first of all: According to O’Connor, the initial mess with the tax forms mistakenly sent out by exchanges made her company’s founder think of how the situation can be fixed at its core. So in TaxBit’s model, exchanges using TaxBit’s service, or just joining its TaxBit Network, can offer free tax accounting for all of their users.
As for retail clients, O’Connor declined to reveal any concrete numbers but said that last year TaxBit generated “millions of tax forms” for consumers. “This year, we’re on pace to do 10x what we did last year,” she said.
TaxBit offers its service free to users of its enterprise clients. CoinTracker charges $59 for “hobbyists” (under 100 transactions per year), $199 for “premium” customers (under $1,000) and customizes pricing for bigger clients.
ZenLedger is a smaller competitor to TaxBit and CoinTracker and raised $6 million in a Series A last August. It chose an opposite approach: focus on retail users and create as many different blockchain integrations as they demand – and the enterprises will follow, said Hannum.
This year, ZenLedger is looking to serve 400,000 customers, which would represent 8x growth from the previous year, Hannum told CoinDesk. In terms of revenue, the company grew 12x – all of it driven by retail.
With the infrastructure bill passed by the Congress last year, stipulating that the U.S. will collect $30 billion in cryptocurrency-related taxes over the next 10 years, the IRS is now busy ramping up its technological and human resources, Hannum said. Over the next 10 years, the IRS is getting $80 billion of federal funding to invest in tech and people – “a large percentage of that will be used for cryptocurrency,” Hannum said.
That’s another opportunity for crypto accounting companies: to provide forensic solutions to government agencies to help them find crypto traders failing to report their taxes properly.
ZenLedger has been providing this kind of technology to the IRS, as well as to the state governments and other countries’ authorities, too, according to Hannum. This global market for taxation regulatory technology is a “multibillion dollar industry,” growing exponentially, he said.
Retail users don’t need to worry about the IRS contract, Hannum says: “ZenLedger and our government contracting arm are two separate entities. ZenLedger will never give customers’ information to the IRS. Instead, the IRS provides our government entity data completely independent from ZenLedger’s client base. Our customers use our software to report their own activity directly to the IRS.”
Household Names Enter
Mainstream tax filing companies, like software provider TurboTax or storefront chain H&R Block, will likely acquire startups specializing in crypto rather than build their own tech from scratch, Hannum predicted.
ZenLedger is getting acquisition offers, he claimed, but for now, his company sees “a big green field ahead” and would rather keep building than sell.
However, some incumbents are building rather than buying: “At Jackson Hewitt, we train our tax pros on tax preparation using our internally sourced training materials (which includes what cryptocurrency is and how to handle it on a tax return) and create our own tax software that can handle cryptocurrency, whether it is payment for a business, payment to a client or investing,” Steber said. The company does not have “an account management or crypto support for portfolio issues,” he said.
TurboTax’s parent company Intuit did not respond to CoinDesk’s request for comment. But TurboTax is definitely looking to get a piece of the crypto tax pie, with its recent ad targeting cryptocurrency traders.
H&R Block, another household name in the tax filing industry, said it “has prioritized enhancing and expanding the cryptocurrency guidance” this year.
“H&R Block is also engaging with leading crypto tax calculator providers to identify solutions that may help our clients navigate the complexities of reporting crypto transactions,” the firm’s media representative said.
Lots of luck, says Kemmerer of CryptoTrader.Tax.
“Traditional tax companies like TurboTax, H&R Block and Jackson Hewitt are going to have extremely difficult times keeping up with the demand for crypto tax services in the future because this is a fundamentally new asset class that requires a completely different tech stack to effectively serve clients (blockchains, wallets, etc.),” he said.
Just as mainstream stock exchanges like Nasdaq and NYSE haven’t built competitors to Coinbase and Gemini, old-school tax accounting firms are struggling to keep up with the nascent market, Kemmerer said.
“As history shows, building brand new technologies from the ground up is extremely difficult for large incumbents who don’t have expertise in the space.”
As more jurisdictions adopt cryptocurrency-specific taxation rules, the U.S.-based startups are looking to expand overseas. TaxBit is looking to serve taxpayers in the U.K., Canada and “most likely, Australia,” O’Connor said, adding the company is talking to potential enterprise clients in Europe and Latin America.
CoinTracker supports clients in the U.K., Canada and Australia, Chandrasekera said, and “planning to expand services into more countries as well.”
ZenLedger is eyeing Canada, Australia and various countries in Europe and Asia, Hannum said.
Crypto Tax Compliance Remains Minefield As IRS Leaves Key Questions Unresolved
A lack of guidance on everything from staking rewards to NFTs means there’s a certain amount of guesswork involved in tax filings.
The old saw about taxes being one of life’s two certainties is only partially true for crypto investors in the United States.
While there’s little argument that gains and losses associated with cryptocurrency transactions are taxable, there is little certainty about which taxes apply to different kinds of transactions and when.
While some U.S. regulators, such as the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission (SEC), have tried to be proactive in providing guidance to the industry about how they plan to treat crypto assets, the Internal Revenue Service has, so far, offered relatively little guidance on some of the most pressing issues facing investors and traders.
“Tax policy is, by far, the area of U.S. policy that’s the furthest behind, as far as having sensible, easy-to-follow rules for people in the space,” said Peter Van Valkenburgh, director of research at industry lobbying group Coin Center. “We saw much earlier guidance from FinCEN on anti-money laundering policy, much earlier guidance from the SEC on [initial coin offerings]. The IRS, when it has issued guidance, it has been perennially late. And that guidance has generally been more confusing than helpful.”
The IRS did not respond to a request for comment for this story.
Kristin Smith, the executive director of the Blockchain Association, put it a tad more diplomatically.
“This is a very fast-moving space, and the IRS and Treasury Department have been trying to wrap their heads around it,” she said.
The agency was actually ahead of other regulators when, in 2014, it offered guidance that classified “convertible virtual currency” (the Beltway term for what most people call “crypto”) as property. However, progress has stalled since then, and the issues have begun piling up.
Smith said the industry generally thinks the IRS is operating in good faith, if more slowly than most would prefer.
“These are obviously people that don’t have deep crypto backgrounds,” she said. “But I think they’ve taken a lot of effort to try to understand this space.”
Congress Gets Involved In Taxing Crypto
If the IRS is moving slowly out of an abundance of caution (or, at worst, bureaucratic inertia), that may be preferable to the alternative, as evidenced by what happened when members of Congress pushed crypto-related language into the bipartisan infrastructure bill that became law in November.
In an effort to bring in more tax revenue from crypto traders, lawmakers created a requirement that cryptocurrency “brokers” report their clients’ trading activity to the IRS.
Unfortunately, the legislative language was drafted quickly and with little input from the industry, leading to a definition of broker that is so broad that industry representatives warn it could encompass wallet software developers and even cryptocurrency miners.
The Treasury Department will have to draft implementing regulations before the law goes into effect in 2024, and in doing so it could narrow the range of entities that qualify as a broker. In a letter to lawmakers made public Feb. 11, the agency appeared to signal that crypto miners and stakers, at least, will not be considered brokers under the pending rule.
“I don’t think that the intention of the law and the IRS is to capture miners, for example, or stakers,” said Omri Marian, a professor of law and the academic director of the Graduate Tax Program at the University of California, Irvine School of Law.
However, he said, it would be a useful sign of “goodwill” for the IRS to reach out to the crypto community during the rulemaking process. “I think that mostly what is needed there is to lower the tension a bit and explain who is and isn’t the broker for reporting purposes.”
Some members of Congress have signaled they understand the industry’s concerns and are open to passing new legislation that would limit the definition of broker to an actual cryptocurrency exchange that facilitates transactions. However, given the deep divisions in Congress, it is unclear what the chances really are of such a bill passing.
Wait, Crypto Is Cash Now?
The same infrastructure bill that created the broker reporting requirement added another twist to the government’s tax treatment of cryptocurrencies. After years of being told their bitcoin and ether are property and not currency, the new law created an exception.
Under existing law, any person engaged in “trade or business” who receives $10,000 or more in cash in exchange for goods or services is obligated to report that transaction. The report, which includes identifying information about the individual who made the payment, goes to the IRS and FinCEN. The new law classifies cryptocurrencies as cash for purposes of that reporting requirement.
Because of the way the law is drafted, reports on crypto transactions of more than $10,000 would only need to go to the IRS, but that hasn’t made industry participants any less concerned about the effect it could have on some sectors of the crypto space.
The problem is that, in many cases, cryptocurrency transactions are functionally anonymous, meaning the individual on the receiving end of a transaction may not have access to the kinds of personal identifiable information about the sender the IRS wants to collect (or vice versa).
Additionally, many crypto transactions take place under circumstances that make it very difficult to assess who would be responsible for reporting. If a smart contract running on a decentralized exchange accepts $10,000 worth of bitcoin, who would file that report?
The Cup Of Coffee Exemption
One of the perennial frustrations of people who would like to use cryptocurrencies as a medium of exchange is the tax treatment of virtual currency as property means that virtually every transaction, no matter how small, amounts to a taxable event.
When someone holding bitcoin uses it to make a purchase, the IRS views the transfer of bitcoin from the buyer to the seller as the disposition of an investment, triggering capital gains taxes. Even the mining fees incurred when transferring bitcoin between two wallets held by the same individual are, technically, taxable.
Some, like Kirk Phillips, a certified public accountant and managing director of Global Crypto Advisors, say the administrative burden of tracking even the tiniest of transactions are standing in the way of cryptocurrencies becoming a more widely used medium of exchange.
“There are definitely people who have changed their behavior based on how it ends up getting taxed and having to go through the compliance gauntlet,” he said. “It’s a major headache.”
There is a bill before Congress that would create what’s known as a de minimis exemption for small transactions. The Virtual Currency Tax Fairness Act, sponsored by Rep. Suzan Delbene of Washington state, a Democrat, would exempt from capital gains taxes all crypto transactions in which the capital gain realized is under $200.
However, despite the fact the bill has broad support in the crypto community and has bipartisan backing in the House of Representatives, its chances of enactment are unclear. This is the third Congress in which the bill has been introduced and, to date, there is no similar legislation pending in the Senate,
Taxation And Staking Rewards
One of the more pressing issues facing the industry, given the increasing preference for proof-of-stake mining, is how staking rewards ought to be taxed.
The basic question is whether the cryptocurrency that a validator receives as a reward for appending a block to a proof-of-stake blockchain is taxable as income when it is received, or whether there is no taxable event until the validator disposes of the currency.
In a lawsuit filed in Tennessee, Joshua and Jessica Jarrett, a couple who run a validator on the Tezos blockchain, sued the IRS over taxes paid on staking rewards earned in 2019. The Jarretts argued that his receipt of the rewards ought not to have been considered a taxable event.
Rather than fight the case in court, the IRS offered, early this month, to refund the taxes the couple had paid, though without offering any clarity on how it would treat staking rewards in the future. The Jarretts rejected the offer, in a move aimed at forcing the courts to resolve the question of how to treat staking rewards.
The resulting situation is representative of much of the tax treatment of crypto transactions. In the absence of clear rules from the IRS, individuals are having to make their best guesses about how they think the agency will treat different transactions.
“I am only dealing with a limited number of taxpayers, but I don’t know of anybody that’s actually withholding on staking rewards,” said Lisa Zarlenga, a partner in the Washington office of the law firm Steptoe & Johnson. “If the IRS’ position is that they should be subject to withholding, I don’t think it’s happening.”
She said that, in general, taxpayers she works with are making a good faith effort to comply with tax laws by reporting income, when they believe it makes sense to report it.
“This could all hit the fan if the IRS starts auditing these transactions and taking positions that are different from what taxpayers are taking,” she said. “Then it could have a stifling effect.”
However, she said that as a practical matter it seems unlikely the IRS would implement some sort of retroactive crackdown that would penalize people who report income in a way the agency subsequently determined to be incorrect.
“I would be surprised if they started imposing penalties on people because they didn’t comply, because there were no rules to comply with,” she said. “What they’re more concerned about are non-reporters, people who aren’t reporting their income from crypto transactions at all.”
Below The Radar
While there may not be much clarity on the tax treatment of staking rewards, at least the crypto community can feel confident the issue is on the IRS’ radar. The same can’t be said for multiple other issues.
Consider, for example, the market for non-fungible tokens (NFT), which reached more than $44 billion in sales in 2021, according to the blockchain data firm Chainalysis. A large segment of that market is made up of pieces of digital art, or the bragging rights thereof.
While new collectors may be content, for the time being, to stare at their digital galleries of Bored Apes and Hashmasks, eventually many are going to want to sell their NFTs. When that happens, how the IRS will treat any profit they realize is an open question.
Regular long-term capital gains taxes in the U.S., which apply to the sale of investments held for more than one year, max out at 20%. But there is a special carve-out for property classified as “collectibles,” a category that includes fine art, that tops out at 28%.
To date, the IRS has been silent on the question of whether NFTs ought to be treated as collectibles, creating the disconcerting possibility that the question of whether NFTs constitute real art might be determined in tax court.
Another area where existing rules are creating confusion is around the tax status of individuals who trade cryptocurrencies for a living. Under the law, an individual who buys and sells stocks and securities can claim “trader status” when they file their taxes, allowing them to deduct business expenses from their trading gains, and offering a number of other benefits.
The problem, said Shehan Chandrasekera, head of tax strategy at Cointracker.io, a portfolio and tax management service, is the statutory language appears to limit trader status to individuals who sell stocks and securities – not property, as crypto is classified.
“For people who are legitimately day-trading cryptocurrencies, the question is whether they should rely on those code sections that are written for stocks and securities to get those tax benefits,” he said. “Because if you can get that trader status, that’s going to save you so much money in taxes. They struggle because it’s only applicable to stocks and securities, but at the same time, it’s unfair for them to not get that treatment, because they’re actual traders of cryptocurrencies.”
This neither-here-nor-there status for crypto traders is analogous to the tax treatment of crypto assets more broadly. It’s a situation that frustrates advocates pushing for more clarity from the government, especially because it contributes to the impression the crypto space is a sort of Wild West, where the normal rules don’t apply.
“There’s this myth that ‘crypto people just don’t want to pay taxes,’” Coin Center’s Van Valkenburgh said. “I think the vast majority of people in crypto, just like the vast majority of Americans, just want clear rules to know what their tax obligations are so that every April isn’t a nightmare. Then they’d be happy – as happy as anyone ever is – to pay their taxes.”
Form 1099-B Is Not The Solution To Your Cryptocurrency Tax Problems
Repurposing tax reporting designed for equity trading ignores the innovation brought about by wallet-to-wallet transactions.
With the passage of the U.S. infrastructure bill in November, “crypto brokers” (i.e., cryptocurrency exchanges and other third parties that facilitate the transfer of digital assets) will be required to report customers’ cryptocurrency transactions to the Internal Revenue Service via Form 1099-B.
Form 1099-B is being framed as a “solution” to your crypto tax problems by regulators and financially incentivized market participants.
Unfortunately, this couldn’t be further from the truth.
The rollout of Form 1099-B among America’s largest cryptocurrency exchanges will create one of the biggest tax headaches for cryptocurrency users you’ve ever seen.
What Is Form 1099-B?
The 1099 information reporting has existed for a long time in the ‘‘traditional‘’ financial world. All 1099 reporting serves the same general purpose: to report non-employment related income to the IRS, i.e., income earned outside of a W2 form.
1099-B is a specific type of 1099 that reports capital gains and losses from securities or property involved in a transaction handled by a broker.
Some examples of brokers you may know from the traditional finance world include eTrade, Charles Schwab and Robinhood. These securities brokers are required to send you and the IRS a copy of your 1099-B at the end of each year reporting your cost basis, proceeds and associated gains or losses from each of your transactions that occurred on the broker’s platform. (“Cost basis” refers to the original value of an asset or investment for tax purposes.)
You as the taxpayer use this 1099-B to report your capital gains or losses on your taxes, and the IRS uses it to verify that you reported the correct amount of income.
Why Are Things Different For Crypto Brokers?
At first glance, it makes sense for regulators to want the same 1099 requirements for Coinbase and Kraken as forCharles Schwab and Robinhood. Both platforms broker the sale or exchange of capital assets that result in capital gain income.
But from a technical perspective cryptocurrency and digital assets operate completely differently from equities. It’s this fundamental difference that makes 1099-B a poor solution for crypto transaction reporting, and it’s this difference that is going to lead to immense pain for taxpayers as 1099-B reporting gets rolled out across all major U.S. cryptocurrency exchanges in the years to come.
Digital Assets And Cryptocurrencies Are Interoperable
Unlike equities, cryptocurrencies and digital assets are built to be interoperable. This is fundamental to the technology underpinning them – blockchains.
The interoperability enabled by blockchains is what enables a crypto user to freely send digital assets from one wallet to another, without the need for a third party to “validate” or “facilitate” the transaction.
This is one of the huge technological breakthroughs of blockchains. The cost associated with running third-party entities to be middlemen for “transferring value” can now be removed, and those economic resources can be deployed more efficiently across the economy.
Peer-to-peer interoperability is a massive technical breakthrough.
Unfortunately, it’s this interoperability that makes 1099-B a terrible solution for tax information reporting for cryptocurrency exchanges.
Cryptocurrency Exchanges Don’t Have Cost Basis Information
Because you can send cryptocurrencies and digital assets freely into or out of your cryptocurrency exchange from any wallet, exchanges won’t always have the cost basis information for your digital assets held on their platform.
Remember, digital assets like bitcoin know no physical boundaries. You can freely send your bitcoin or ether from a wallet that you self-custody into your exchange of choice, without friction.
These wallet-wallet digital asset transfers happen millions of times every single day.
As a result, when you transfer your cryptocurrency assets into your exchange of choice, your exchange typically does not know the original cost basis for that cryptocurrency .
This is critical to understand. If your cryptocurrency exchange accepts wallet transfers into its platform, your exchange will not always be able to fully complete a 1099-B for you because it’s missing a critical component for reporting: cost basis.
Say you buy 1 bitcoin for $20,000 from Cryptocurrency Exchange A. Immediately after the purchase, you send it to your self-custodied wallet for safekeeping. Months later, after bitcoin has skyrocketed in price, you decide it’s time to sell so you send your bitcoin from your self-custodied wallet to your other exchange, Cryptocurrency Exchange B, and sell it for $50,000.
In this simplistic example, Cryptocurrency Exchange B has no idea that your cost basis for your 1 bitcoin is $20,000. Cryptocurrency Exchange B only sees a transfer of 1 bitcoin into its platform from a third-party wallet and a sale of this BTC for $50,000.
With the passage of the infrastructure bill, Cryptocurrency Exchange B will be required to report this disposal of BTC on a 1099-B to the IRS. However, it will be reported with a blank, or null, cost basis field:
* Proceeds: $50,000
* Cost Basis: Unknown
* Gain: …. $50,000 ?
When the IRS receives a copy of this 1099-B, it will see that you sold $50,000 of bitcoin on Cryptocurrency Exchange B. However, it will not be able to see that your true capital gains for this transaction were actually only $30,000.
It will be up to you to prove your cost basis was indeed $20,000. If you can’t prove it, you could be stuck with a zero-dollar cost basis and face a $50,000 capital gain tax bill.
This, of course, is going to happen at scale, for millions of taxpayers, with millions of 1099-Bs, all with blank or unknown cost basis fields.
Cost Basis Transfer Reporting
I know what you’re thinking.
“We should just require exchanges to report cost basis information to each other whenever customers transfer digital assets to and from their platform!
That’s how it works for equity brokers!”
Naturally, this is exactly how the regulators see the issue, and this is why a component of this new legislation for cryptocurrency brokers requires exactly that: cryptocurrency brokers to report cost basis information to each other.
However, this approach does not solve the fundamental problem.
Remember, at their core, cryptocurrencies and digital assets operate in a completely decentralized fashion – very different from equities.
They don’t depend on centralized third-party companies to exist or operate. Yes, many centralized companies (crypto exchanges) have popped up to make it easier for users to interact with blockchains themselves, but these centralized exchanges are not the only players in this market.
The ecosystem consists of thousands of decentralized wallets, protocols, non-fungible token (NFT) marketplaces, and other applications that enable users to interact with these same blockchains – whether using a centralized third party or not.
For 1099-B reporting to be truly effective (in the way that it is effective for traditional equities brokers), cryptocurrency brokers would have to operate in a siloed, walled-garden fashion.
They wouldn’t be able to allow transfers into or out of their platforms if the counterparty couldn’t pass along or store sensitive customer data for them. If they did, they wouldn’t be able to accurately report cost basis and thus gains/losses to users.
Is Coinbase going to shut down the ability of its users to accept wallet deposits from decentralized finance (DeFi) protocols, self-custodied wallets, decentralized autonomous organizations (DAO) and other decentralized market participants that don’t have the ability to report a user’s cost basis, name, address and Social Security number upon a transfer into a Coinbase custodied wallet?
Given its mission of enabling an open financial system, I hope not.
The 1099-B is not the solution for cryptocurrency tax reporting.
Financially incentivized market participants that have raised hundreds of millions of dollars of venture capital will try to convince you that it is but alas, it is not.
Digital assets will continue to operate in an open and decentralized fashion whether or not regulators force the hand of America’s largest cryptocurrency brokers. The genie is out of the bottle, and decentralized applications used by millions of people all over the world are only going to become more developed in the years ahead.
So, instead of enforcing 1099 reporting that was developed for a completely different asset class, what if we came up with new, more sensible rules? (We have some ideas!)
If we don’t come together to create new, thoughtful regulation for this fundamentally new asset class, we risk forcing one of the largest technology shifts of our time to be developed outside of the United States.
I encourage all regulators and stakeholders to get in touch with myself and my team directly if these matters are meaningful to you, or if you simply have questions. We would love to chat.
How Web 3 Could Change Tax Collection
The traditional third-party information reporting system is incompatible in Web 3 because its transactions don’t have a third-party.
What Comes Next?
Shehan Chandrasekara is a crypto certified public accountant (CPA), who acts as the head of Tax Strategy at CoinTracker.io, a software that helps you comply with crypto and non-fungible token (NFT) taxes.
The current Web 2-based U.S. financial system is centered around “accounts” tied to centralized third parties. You start everything by signing up for an account using an email and a password. Accounts are maintained by centralized third parties on your behalf.
These third parties are required by law to capture your identity when creating financial accounts such as bank accounts, cryptocurrency accounts and brokerage accounts. Your identity is gathered through a process known as Know-Your-Customer (KYC), which ensures your real-world identity is tied to each of your digital financial accounts.
But what happens when we move to a financial system based around wallets, as envisioned by the cryptocurrency industry? Who collects this user information? How would regulators collect taxes from anonymous wallet holders?
This account-centric system ensures mass tax compliance by employing what’s known as a third-party information reporting system. How this works is simple. Third parties such as centralized cryptocurrency exchanges, stock brokerages and banks report your financial activity to the Internal Revenue Service. This is a legal requirement for third parties under IRS code §6041 and §6045.
The reporting is usually done using a series of tax forms such as Form 1099-B and Form 1099-INT that report your annual capital gains/losses, interest, dividends, miscellaneous income to the IRS. You also get a copy of these forms at the end of the year to file with your taxes. So, by the time you file your tax return the IRS already has your info reported by third parties.
If you don’t report the activity on your tax return and pay taxes, the IRS Document Matching System automatically detects the discrepancy and sends you a tax notice demanding you fix the error and/or pay additional taxes. This checks-and-balance system ensures mass tax compliance in the account-centric financial system we have today.
The above third-party information reporting system has been very effective when it comes to improving tax compliance. The system is designed to trigger the taxpayer to file a tax return by sending a tax form during the tax filing season. For example, 99% of taxpayers file their taxes when they receive a Form W-2 from employers.
More than 80% of stock account holders file their taxes when they receive a Form 1099-B from brokerages summarizing the annual capital gain/loss activity. On the other hand, if a third party doesn’t generate a tax form, more than 50% of taxpayers do not pay the taxes.
Web 3: Wallet-Centric Financial System
In Web 3, you start everything by creating a wallet as opposed to signing up for an account. Your identity is tied to wallets such as MetaMask or Phantom, not to an account hosted by a centralized third party. Notably, you are pseudo-anonymous. The owner of the wallet is a public record on a blockchain identified by a series of numbers and letters (0x71C…….d8976F). The wallet is not tied to your real-world identity as in an account-centric financial system.
Web 3 is in the process of replacing the account-centric financial system with a wallet-centric financial system. For example, the most popular Web 3 wallet, MetaMask, now has over 21 million monthly active users.
The biggest decentralized exchange (Uniswap) and NFT marketplace (OpenSea) are powered by wallets, not accounts. Web 3 allows you to connect with protocols and complete peer-to-peer financial transactions without ever having to go through a third-party intermediary, as seen in an account-centric financial system.
Taxation In A Pure Wallet-Centric Economy
A pure wallet-centric economy risks tax compliance and enforcement because there’s no practical way to implement a third-party information reporting system. The tried and true, traditional third-party information reporting system is fundamentally incompatible in Web 3 because Web 3 transactions don’t have a third party.
Third parties are replaced by protocols that facilitate peer-to-peer transactions with no identity-related knowledge of the parties involved in the transaction.
This will make 1099 form generation impossible because in most cases there’s no third party to generate them. Even if a protocol could generate 1099s, the reports will be incomplete, without the taxpayers’ personal identification information such as name, address and Social Security number. Further, the amounts reported will be inaccurate because the protocol has visibility only into what’s happening inside the protocol.
Absent of a robust third-party information reporting system, pseudo-anonymous wallet holders have no incentive to self-report taxes. Say you get paid directly to your MetaMask account from the decentralized autonomous organization (DAO) where you work.
You can pay rent in crypto. You can buy groceries in the decentralized version of Amazon that allows you to sign in using your wallet and pay in crypto. You don’t have to convert anything into fiat because you can maintain your life online.
Potential Web 3 Tax Solutions
The right Web 3 tax policy should be enforceable, practical and preserve the anonymity of wallet holders. It will be interesting to see how regulators think about ensuring tax compliance in Web 3 in the next decade. Potential tax policy-driven approaches could include the following:
* Transaction Tax: Works Similar To Sales Taxes In The U.S. And Avoids Complex Basis Tracking Required Under The Current Income Tax Regime
* Entrance Tax: Imposes A Tax On Fiat Onboarded To The Crypto World Through Centralized Exchanges
* Exit Tax: Imposes A Tax On Crypto Offloaded To The Fiat World Through Centralized Exchanges
We could also see protocols innovating solutions (e.g., by leveraging zero-knowledge proofs) that enable wallet holders to cryptographically prove their tax compliance without ever revealing their identity.
Review of 6 Crypto Tax Software Packages
A crypto tax expert investigated a host of innovative and ambitious crypto tax companies and the products they offer. Here’s what he found.
Pull a Marty McFly and beam back to 2018 – the term “crypto” is a byword for “scam” and economist Nouriel Roubini is triumphantly calling the crypto space “La-la land.” Fast forward to 2021 and the L.A. Lakers’ basketball arena has been renamed “Crypto.com Arena,” National Football League legend Tom Brady is trading non-fungible tokens (NFTs), and El Salvador has made bitcoin (BTC) a legal tender.
Much of the media attention is going to the metaverse, all-time price highs and DOGE with the future of finance is being pushed on all sides. But perhaps the most archaic part of finance is getting a 21st-century makeover, as well. That dinosaur is called the tax industry.
In recent times, the tax industry has made strides in its attempt to understand the industry and flesh out the nitty-gritty tax details that come with a brand-new asset class. However, filing crypto-related taxes can still be an arduous task, with a variety of different forms, calculations and recording of transactions.
That said, a host of young, innovative and ambitious crypto tax companies have risen to the occasion – ready to reduce your tax-related stress before deadline day.
I’ve spent some time going through each company, speaking to key people, analyzing the prices of their products, the number of applications available and using their user interfaces. Here’s what I found.
The bitcoin bug bit Dennis Wohlfarth in 2014 when he was working in Italy as a mechanical engineer servicing Ferrari. Three years later, a group of founders hailing from Germany, Switzerland and the United States fleshed out the blueprint for Accointing.com, and they subsequently launched the company in 2019.
With a European vibe, Accointing offers crypto tax reporting solutions for Australia, Austria, Germany, Switzerland, the U.K. and U.S., ranging between $79 and $299 (plus a free tax report), as well as a portfolio-tracking app and desktop solution. Included in its offerings is a product called Trading Tax Optimizer, which can help users optimize their taxes through tax-loss harvesting and analytics.
Earlier this year, the startup partnered with Swiss-based audit giant BDO Global, bolstering its brand as well as cementing a key traditional tax partner in Europe. “We want our team to bring in their personal touch … so we can expand our tax solutions in Europe and then to the APAC (Asia-Pacific). We want to expand our blockchain connections, NFT and decentralized finance (DeFi) tax support [and] our portfolio features,” Wohlfarth says.
Kickstarted in 2017, CoinTracker is the brainchild of former Google employees Jon Lerner and Chandan Lodha, who have embraced an “engineering-driven culture” and who turned CoinTracker into a unicorn this January, when CoinTracker announced an exclusive partnership with crypto exchange Coinbase, embedding its software directly within Coinbase’s tax center.
“We want to be the layer that helps people interact with crypto and not give them headaches in relation to compliance matters,” said Shehan Chandrasekara, CoinTracker’s head of tax
CoinTracker offers four types of tax solutions covering Australia, Canada, the U.K. and U.S. – with tax packages ranging from a free tax report and paid options ranging from $49 to a $159 package. It also provides an “Unlimited” solution that is priced individually.
Another strong suit is the company’s enterprise solution, with the “biggest players” in the market looking to do business with CoinTracker.
Rounding up its offerings is a portfolio tracker that provides exclusive insights into a user’s holdings and allows the user to tax-loss harvest and track NFTs and DeFi transactions.
This year is going to be big for CoinTracker, Chandrasekara said. “We will continue to hire aggressively and listen to our users. We expect to reach 1 million-plus users on the platform during [this] tax season,” he said.
CoinLedger – formerly CryptoTrader.Tax – was born of necessity in 2017 because David Kemmerer, Mitchel Cookson and Lucas Wyland were looking to report “over 120,000” trades made through arbitrage investing.
“We were pretty frantic,” Kemmerer, the CEO, says. “There was nowhere to report our taxes, so we had to fix the problem ourselves.”
Tasked with figuring out how to report its own holdings, CoinLedger had to develop the “picks and shovels” for its tax tool, releasing the first version of its tax platform in spring 2018.
Since then, CoinLedger has built a tax tool offering geared toward the U.S. market, allowing users to tax-loss harvest and benefit from its TaxAct feature – helping users navigate tax season.
Prices per tax offering range from $49 to $299, with the most expensive solution allowing reporting for an unlimited number of transactions. It also offers a business-to-business (B2B) solution, helping certified public accountants (CPAs) serve their personal clients.
Back in December CoinLedger partnered with crypto broker and portfolio tracker Voyager, and in 2022, it is looking to launch NFT tracking for its portfolio and release more portfolio tools for its free portfolio-tracking solution. “We want to reduce the friction for participating in crypto, so we’re focusing on our analytics reporting and making sure we get the data right,” Kemmerer said.
Starting out in their parents’ basement, Austin Woodward and his brother Justin Woodward founded TaxBit. The brothers quickly realized the tax burden crypto traders could face following the crash in 2017.
“They realized that there was no way this industry [crypto taxes] could go mainstream and be compliant unless people could accurately track their investment,” said Michelle O’Connor, the company’s vice president of marketing.
From its humble beginnings, TaxBit launched in 2018 and has since won an exclusive partnership with the Internal Revenue Service (in May 2021) and achieved unicorn status three months later in August.
TaxBit offers tax services for individuals ranging from a free offering to paid offerings ranging between $50 and $500. It also provides enterprise and government solutions, helping both companies and regulatory bodies remain tax compliant, assisting them to better understand the crypto space.
It also offers a portfolio-tracker app, providing key insights into users’ holdings as well as the TaxBit network, where users of member companies can access free tax forms. And it looks to “gamify” crypto taxes through its tax optimization feature and its one-of-a-kind NFT dashboard and tracking service.
“[In 2022] we’re going to continue to iterate on DeFi and NFTs, we’ve had a tranche of partnerships that are ready to launch, and we will also focus on our public sector,” O’Connor said.
TokenTax CEO Zac McClure’s life is pretty “eclectic.” Starting off at JPMorgan, he found himself teaching math for Teach for America before embarking on a journey to Zimbabwe to help locals there learn more about personal finance.
Following a stint at Imprint Capital where he wrote the firm’s investment thesis for Ripple, McClure said, “I fell in love with crypto and I had a finance and accounting background, then markets exploded [in 2017] and friends everywhere asked for my help to figure out their taxes.”
Come 2017, TokenTax was operational for retail investors, and it now offers four crypto tax report plans, covering Australia, Canada and the U.S. with prices ranging from $65 to a $3,500 VIP package offering IRS audit assistance. It also offers specific services for margin trading and tax-loss harvesting.
“We are expensive, but we solve the most difficult problems. If the other software doesn’t work for you, you go to TokenTax,” McClure said. TokenTax has also been active in its collaborations, joining forces with eToro, Binance and Crypto.com. Staying true to his teaching roots McClure said, “[In 2022] we want to expand our wallet integrations, teach people about taxes and take some of the tax stress off people’s shoulders.”
Pat Larsen, ZenLedger’s CEO might be as “stars and stripes” as it gets. Serving in the military as a helicopter pilot and with two tours of duty under his belt, Larsen got an MBA from the University of Chicago before becoming an investment banker.
Noting that the nascent crypto industry would require traders to pay taxes, Larsen said that he believes that “the point of tax services is to take you from a state of stress to a state of calm. It’s to get the numbers right.” Hence the name ZenLedger.
Current U.S.-focused tax offerings include a free tax reporter for up to 25 transactions and products that cost $49 to $399. The company also provides specific NFT and DeFi support with professionally prepared tax plans that range in price from $195 to a $6,500 two-year tax plan.
Additionally, a tax-loss harvesting tool is available for users as well as a direct Turbo Tax integration. Partnerships include one with digital asset management company Valkyrie and eToro.
When asked why people should pay crypto taxes, Larsen said: “If you are a U.S. citizen, you should avoid being a felon. The sheriff will come and have a gun on his hip.”
In terms of ZenLedger’s outlook for 2022, Larsen said, “We want all hands on-deck and what we built is a powerful offering. The pace of development will also accelerate.”
Aiming to turn the lethargic traditional tax industry on its head, these young guns have taken it into their hands to do the hard thinking for you.
Whether that be figuring out how to track coin transactions across DeFi platforms, understanding how to tax NFTs or how to automate tax reporting – the crypto tax tool industry has had to wrap its head around some of the biggest challenges that have come with the rise of crypto.
At the end of the day, hate them or love them, you’re going to have to pay your taxes. No matter if you’re coding solidity at Ethereum or playing with that 100 times leverage on Binance’s margin trading platform – government regulators will be looking to tax your crypto transactions. So, give these tax companies a few minutes of your time and avoid a sticky situation on tax deadline day!
10 Red Flags That Could Trigger An IRS Tax Audit In 2022
Accounting for pandemic-inspired grants, loans and tax credits could make it a tricky year for many.
For most Americans, any letter from the Internal Revenue Service sparks fear, especially a notice of a tax audit.
Unfortunately, a confluence of factors—including the pandemic-inspired federal grant, loan and tax-credit programs—will make this a particularly complex tax-filing season for individuals and business owners.
“Filing your taxes could be a minefield this year because of all the tax-law changes, credits and programs that rolled out,” says Larry Gray, a partner at Rolla, Mo.-based Alfermann, Gray & Co. CPAs. “Make sure you have all the appropriate documentation and information,” says Mr. Gray, who is also government liaison for the National Association of Tax Professionals.
To avoid a tax audit, the best thing you can do is file a return that is correct and complete, says Eric Smith, an IRS spokesman. When your return is right to start with, the chances that you’ll hear from the IRS go way down, he says.
Filing electronically is also recommended since you can amend and fix any issues more quickly.
Fewer than one million Americans get audited each year. But individuals who don’t file their taxes, or underreport their income, are top of the list.
So what are the red flags on your tax forms that can trigger an audit? According to the IRS and tax professionals, here are 10 that can easily trip up filers.
1. Education Tax Credits
Two types of education-related tax credits were issued last year: the $2,500 American Opportunity Tax Credit, primarily for students pursuing an undergraduate degree; and the $2,000 Lifetime Learning Credit for people pursuing a career change or advanced educational training at a postsecondary school.
Both come with eligibility requirements. For example, the American Opportunity credit requires that the student be in school at least half time, and that the money be used for tuition, books and required fees—but not room and board.
“It’s important not to claim the wrong tax credit on your 1040; we see this confusion a lot,” says Bryan Cannon, chief executive of Cannon Advisors, a firm that does tax planning. “You also cannot claim both credits in the same tax year,” Mr. Cannon says.
A tax credit is a direct reduction, dollar for dollar, in the amount of taxes owed, rather than a reduction in taxable income.
• Red Flags: Claiming the wrong credit or both in the same tax year; claiming multiple tax breaks for the same college expenses; and not submitting Form 8863—used to figure and claim your education expenses.
2. Small Businesses
Small businesses will get a lot of scrutiny from the IRS this tax season, especially S Corps, sole proprietorships and partnerships making $100,000 a year that are cash-intensive—such as restaurants, bars, grocery stores and beauty shops. It is a category in which excessive deductions and underreporting of business income are often suspected.
Proprietors and partners of small businesses also sometimes are tempted to declare artificially small salaries for themselves to lessen the tax impact on the company and themselves.
“Don’t try to avoid paying payroll taxes by paying yourself a very low wage—the IRS computer system will pick up on that,” says Mark Pendergast, a principal of Inspired Financial, a wealth-management and tax-planning firm in Huntington Beach, Calif.
Business owners who received emergency stimulus loans in the Paycheck Protection Plan under the Cares Act also should be vigilant. Those “loan amounts could be taxable income if the proceeds were used improperly,” says Andrew Sherman, partner at Seyfarth Shaw LLP, a Chicago-based law and advisory firm.
At least 60% of the proceeds were required to be used to cover payroll costs, utilities, rent and mortgage interest.
• Red Flags: Failing to report all taxable income; taking low wages; overstating deductions; claiming high losses well above those in earlier years; not recording debt forgiveness; intermingling personal and business income and expenses; excessive travel and entertainment expenses; and amended returns.
3. Child Tax Credit
Adjustments to the child tax credit made in 2021 could trigger audits for several reasons. For eligible families, the credit increased to $3,000 from $2,000 for children ages 6 to 17, and to $3,600 from $2,000 for children under 6.
In addition, as part of the American Rescue Plan of 2021, advance payments of up to one-half of the child tax credit owed were sent monthly to eligible taxpayers. About 60 million children were covered by advance payments starting on July 15, the U.S. Treasury Department says.
In their filings for 2021, taxpayers now must reconcile the amounts they were paid with the amount they qualified for. Some may have to pay back money they didn’t qualify for, while others could get a bigger tax refund.
“This is one of the biggest audit triggers this year for millions of Americans, and at income-tax time there will be many surprises,” says Jovan Johnson, chief executive of Peace of Mind Wealth Planning in Atlanta.
It is a sticky reporting issue because there is so much room for error for married joint filers, couples who got divorced or families that moved. “Checks could have gotten lost, and direct deposits in the account of one former spouse could have not been accounted for,” says Marilyn Meredith, an enrolled agent who runs Meredith Tax Service in Port Huron, Mich.
Further complicating matters, in January the IRS announced there were errors in some copies of its Letter 6419 sent out to credit recipients; in some letters, wrong amounts were shown for the payments that recipients had received.
As a result, all recipients of the child tax credit are urged to go to IRS.gov/Account and the IRS Child Tax Credit Update Portal, where they can find the correct amount of their advance payment.
• Red Flags: Inaccurately reporting the amount of the advance payment; misstating your income.
4. Cryptocurrency Transactions
Anyone think the IRS isn’t taking cryptocurrency seriously? The No. 1 question on this year’s Form 1040 asks if you have received, sold, traded or disposed of any financial interest in a virtual currency. The IRS has a mandate to collect $30 billion in crypto tax revenue over the next 10 years, and is treating all types of digital currency as property for tax purposes.
“The IRS has seen the tremendous growth in this industry, but the number of people reporting their crypto income for tax purposes is not growing at the same rate,” says Dan Hannum, chief operating officer at Zenledger, a crypto tax software company contracted by the IRS to track the cryptocurrency movements of U.S. citizens.
Tax filings related to crypto earnings pose challenges because most investors use several exchanges world-wide and 10 to 20 different digital wallets, Mr. Hannum says. It is up to individuals to aggregate all of this information on Form 8949.
That’s why many tax pros recommend crypto investors seek the help of crypto tax specialists. “Don’t think the IRS can’t track your activity on a digital wallet. That’s no longer true,” says Mr. Hannum.
• Red Flags: Underreporting crypto income and any interest income from a crypto interest account or from a nonfungible token; and not listing all of your taxable trades individually.
5. Earned-Income Tax Credit
Each year about 25 million low- and moderate-income Americans seek a refundable earned income tax credit (EITC). The amount they receive depends on many factors including if they have worked and earned income is under $57,414, have investment income below $10,000 in the 2021 tax year, are disabled, have a qualifying child, or meet other criteria. The maximum for the 2021 tax year is $6,728.
But billions of dollars of these credits are paid in error, according to the IRS. That’s why the agency is scrutinizing claims to prevent fraud.
For 2021 only, more childless couples qualify for the EITC and for the first time it is now available to both younger workers and senior citizens. To qualify, workers typically must be at least 19 years old. Students under 24 don’t qualify.
• Red Flags: Claiming children who aren’t the taxpayer’s qualifying children; using an incorrect filing status; earning $10,000 of investment income or more; and overreporting or underreporting income.
6. Large Charitable Contributions
For charitable donations to be deductible, the recipients must be qualifying organizations such as religious organizations and nonprofits. But if the deductions are high compared with your annual income, they will be reviewed and perhaps audited by the IRS.
Deductions for cash donations to charitable organizations typically cannot exceed 60% of a certain calculation of your adjusted gross income (the limit was expanded to 100% for cash donations in 2020 and 2021), and the limit is lower if the donation isn’t cash or is made to organizations such as certain private foundations. For more details, see IRS Publication 526, Charitable Contributions.
• Red Flags: Lack of receipts, canceled checks and written acknowledgments for any donation of $250 or more; inflated values for noncash donations, as well as failure to get appraisals; and not providing documentation for qualified charitable contributions from your IRA.
7. Rental Income
Many people new to the rental business (and there are many, thanks to the rise of Airbnb ) don’t realize that all rental income is generally considered passive income, not active income.
So if you have a rental loss for the year, because your operating expenses exceed your rental income, you cannot deduct it against your W-2 income. This is a common mistake filers make, says Mr. Johnson in Atlanta.
Another issue that trips up filers is attempting to claim deductions on a mixed-use rental property, which is a dwelling that is a personal residence and is rented part of the year.
“The more you and your family use the property, the less deductions you qualify for,” says Matthew Lincoln, principal of Lincoln Tax Professionals in Fredrick, Md. “You need to keep a log on the use of the property and keep receipts on any expenditures so you can verify your deductions if you are audited.”
• Red Flags: Underreporting rental income; claiming large rental losses as deductions; and excessive or vague deductions.
8. Home-Office Deductions
The home-office deduction might be a tax quagmire this year due to confusion over who qualifies. The Tax Cuts and Jobs Act in 2017 suspended tax write-offs related to home offices for employees of companies through 2025.
That means millions of people who worked remotely last year during the Covid-19 pandemic aren’t eligible. Only people who were self-employed in 2021 can claim the deduction.
The tax break is limited to income from the business and covers expenses for business use of your home, including a portion of mortgage interest, rent, insurance, utilities, repairs and depreciation.
It also covers office supplies, postage, computers, cellphones and other things you use to run your business. If you did freelance or self-employed work during the year, you may qualify for a partial-year home-office deduction.
“But it must be a room exclusively and regularly used for business and to meet clients. If you are working on your laptop in the family room it doesn’t qualify,” says Rick Reynolds, an independent enrolled agent who used to work at the IRS.
The deduction could be disallowed if it was used both for W-2 work and self-employment work.
• Red Flags: Claiming a large percentage of your home’s space, and claiming a deduction if you are a W-2 worker.
9. Early Withdrawals From IRAs or 401(k)s
The IRS is looking at these transactions closely, so individuals need to be clear on the rules. Payouts from a traditional IRA or 401(k) before age 59½ generally incur a 10% penalty on top of regular income tax. For Roth accounts, parts of early distributions can be taxable and the 10% penalty can apply.
There are a few exceptions—for example, if you retire early at age 50 and you are a police or law enforcement officer.
The Covid-Related Tax Relief Act of 2020 waived the 10% penalty to provide relief to taxpayers during the pandemic but it was reinstated last year.
Be sure to report and document (Form 1099-R) all taxable income. The IRS can cross-check any numbers you report on your tax return through its computer system.
• Red Flags: Failing to report income from IRA or 401(k) distributions, and not including all documentation with your 1040.
10. Health Premium Tax Credit
Many people last year qualified for tax credits to help them pay for their premiums on health insurance purchased through the government-run marketplaces. Recipients of this benefit must complete Form 8962 and submit it along with their tax return.
This will show any differences between how tax credit they qualified for versus how much was actually paid to the healthcare provider.
The result could mean a bigger refund or less tax owed, or the opposite if payments exceeded the credit allowable. Recipients can estimate their total allowable credit on healthcare.gov—search for “tax credit.”
The process can be confusing, and eligibility requirements changed last year. Prior to 2021, people who had incomes up to 400% of the federal poverty level qualified.
That has changed. For 2021 and 2022, some people with incomes of more than 400% of the poverty line can also get credits, depending on the cost of the policy. Individuals on Medicaid, Medicare or other federal insurance do not qualify.
“The biggest problems with this credit occur when taxpayers who apply for coverage in the marketplace underestimate their income to get lower monthly premiums. Then when they file their taxes they find out they have to pay a portion, or the entire credit, back to Uncle Sam,” says Mr. Cannon. “It can happen if a person got a higher-paying job during the year.”
• Red Flags: Married couples who file separately, a category that receives IRS attention because of increased potential for mistakes and fraud; not supplying documentation if you received unemployment benefits; and not including the premium-tax-credit Form 8962 with your 1040.
Cryptocurrency Tax Guide 2021-2022, Filing Your Bitcoin And NFT Taxes
The IRS is cracking down on cryptocurrency tax cheating.
Cryptocurrency owners, beware: The IRS is trying to strip away excuses for millions of people who aren’t complying with the tax rules on them, either inadvertently or on purpose.
The agency has put a pointed question on the front page of the Form 1040, just below the taxpayer name and address. It first appeared on the 2019 tax return in a less prominent position and moved to its current place on the 2020 return.
On the 2021 return, the question has been reworded slightly: At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?
The tax filer must check the box “Yes” or “No.” Cryptocurrency owners who don’t answer the question or are untruthful risk higher penalties if the IRS audits them, as it will be hard to claim ignorance of the rules.
The agency also has other crypto enforcement efforts under way. In 2021, it persuaded judges in Boston and San Francisco to approve summonses requiring two cryptocurrency exchanges to turn over records for customers who had more than $20,000 in transactions in any year from 2016 to 2020.
The IRS Says Cryptocurrencies Such As Bitcoin Are Property
The IRS first released guidance on the taxation of cryptocurrencies in 2014. It said that bitcoin and other cryptocurrencies are property, not currencies such as dollars or euros. Often they are investment property akin to stock shares or real estate.
This means that if the crypto is held in a taxable account—as opposed to a retirement account such as an IRA or Roth IRA—net profits from a sale are typically taxed as long-or short-term capital gains, and losses can be used to offset gains.
This tax treatment has benefits, but also important drawbacks. If cryptocurrency is used to make a purchase—even of a sandwich—then the transaction typically generates a taxable sale of the crypto that the buyer must report to the IRS.
For example, say that Jack buys a boat with $10,000 of cryptocurrency that he purchased for $5,000. Jack’s transfer of the crypto is taxable. He has to report a taxable gain of $5,000 to the IRS—much as if he bought the boat with shares of stock that had grown from $5,000 to $10,000.
This makes cryptocurrencies a cumbersome substitute for cash.
In 2019, the IRS issued more crypto guidance, including rules for how holders should treat cryptocurrencies if these undergo a reorganization that changes the network protocol of coins or results in the distribution of new tokens.
It said that if a cryptocurrency owner receives something of value, then its fair market value is taxable at ordinary income rates when the taxpayer has control of it.
In late 2020, the Financial Crimes Enforcement Network (FinCEN), a Treasury Department unit separate from the IRS, announced it may require U.S. taxpayers holding more than $10,000 of cryptocurrencies offshore to file FinCEN Form 114, known as the FBAR, to report these holdings. This rule hasn’t yet been adopted, so it wasn’t in effect for 2021.
How To Navigate Cryptocurrency Tax Implications Amidst The CPA Shortage
High demand for CPAs has left many to fend for themselves when it comes time to figure out the complex tax landscape marked by virtual currencies.
Cryptocurrency is a hot topic worldwide, especially with prices of Bitcoin (BTC), Ethereum (ETH) and other cryptocurrencies hitting higher thresholds and resulting in another banner year for investors.
While the earnings look good on paper, one factor is often left to consider –– that is, crypto taxes.
It is not uncommon for traders to take advantage of the constant fluctuations, buy the dip, sell the uptrend, and repeat it frequently. Unfortunately, each transaction is considered a taxable event, making the conversation about cryptocurrency taxes a daunting one.
The impending crackdown on cryptocurrency taxation only spurs on the need to start the conversation. This crackdown is far from recent, with 2021 headlines of an IRS chief stating the country was losing trillions of dollars in unpaid taxes each year, with a significant portion being attributed to the crypto market.
For this reason, several subpoenas currently exist against Coinbase, Kraken, and Poloniex in the U.S., which obligates these exchanges to share the information with the IRS.
Events like this have since fuelled more recent announcements of the IRS seizing billions of dollars in cryptocurrency that may be related to tax fraud.
While some of these actions to evade paying taxes seem extreme, especially in comparison to one’s own calculation errors, it is worth noting that it is always the ones intentionally avoiding taxes that may be affected by the imposing crackdown.
The IRS And Crypto Investors
The IRS has recognized that more investors are now taking part in the digital currency market than ever before, an action that is one part hype and many parts attributed to the amount of money the government gave out throughout the COVID-19 pandemic.
With more discretionary income in the hands of investors, the number of crypto traders in the U.S. hit an all-time high and continues to increase. At present, an estimated 55% of American investors are believed to hold Bitcoin, according to Grayscale Investments.
Recognizing this, the 2021 version of IRS Form 1040 now asks recipients if, at any point throughout the year, they have received, sold, exchanged or disposed of another financial interest through virtual currency.
Users must then check the “Yes” or “No” box in response. The IRS further proves their crackdown by placing this question on the form, directly below a taxpayer’s name and address, a location that can’t be missed.
The language has also been clarified to specify that only taxable events, including receiving cryptocurrency as payment, airdrops, exchanging different cryptocurrencies, selling assets, earning from mining and staking, would be classified as a “yes” on the updated form.
The Impacts Of The Great Resignation
After checking yes comes the more challenging step of crypto tax management, figuring out the balance owing. The IRS has made it known that cryptocurrency/virtual currencies are considered property.
Therefore, users must recognize and report any taxable gains or losses, with failure to do so resulting in a potential audit, interest payments, and rare penalties in extreme circumstances.
As a result, many have turned to a professional crypto accountant for guidance.
In a traditional, pre-pandemic year, 15% of staff have left one of the big four accounting firms, including Ernst & Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PwC).
Although there is no certainty if these stats will remain the same this year, many firms agree that turnover rates will be higher than in previous years.
This year, following another year in the pandemic, has resulted in the profession at large being overworked and underpaid. As a result of the ongoing economic trend labeled the Great Resignation, an estimated 40% of accountants have left the CPA industry, leading to an overwhelming shortage of professionals.
Traditionally, as the laws of supply and demand state, with decreased supply comes increased prices, and therefore a lesser chance of an investor getting the help they need with their taxes.
Of course, even those who have the funds to hire a CPA may still have difficulty finding one with the crypto tax expertise to help.
Managing Your Cryptocurrency Taxes
With fewer resources available, the question of paying cryptocurrency taxes doesn’t necessarily mean users should navigate the complex tax landscape alone. Instead, the release of new crypto tax software has simplified the process for users to organize their crypto data and calculate their tax liability.
One of these offerings is Accointing, a cryptocurrency tax software with over 400 integrations, including Binance, BitMex, Kraken and Tron, enabling users to access data in one consolidated location, automatically calculating a crypto trader’s wins and losses and classifying transactions like decentralized finance (DeFi) staking, margin trading and mining.
As a member of their team describes it, “Accointing is an easy to use and beautifully designed platform built to help users handle crypto taxes on their own, without the need for a CPA to process data. Users can file their yearly income and taxable gains to the IRS by giving the output provided by Accounting’s crypto tax calculator to a CPA, or via the dedicated TurboTax output.”
The result is that in a matter of five clicks, users can generate a customized cryptocurrency tax report for their country of location. Investors may also use the “holding period tool” to optimize transactions, recognizing which tokens have been held for a year or more.
With offerings like Accointing, users can navigate the daunting tax landscape of the cryptocurrency world and avoid the battle for a dwindling accounting force.
Jeff Bezos, Elon Musk Tax Data Leaked Out A Year Ago. IRS Leaders Still Wait For Answers
Treasury Secretary Yellen, Commissioner Rettig and lawmakers say they want findings from investigations, and have so far received none.
Top U.S. officials who oversee the Internal Revenue Service are expressing growing dismay with a year-old D.C. mystery: how confidential information about the nation’s wealthiest and highest-income taxpayers—including Jeff Bezos and Elon Musk—became public.
Extensive disclosures to news organization ProPublica made public the tax figures of many of the most well-known ultrawealthy Americans, showing their incomes, payments and tax strategies.
There have been no arrests nor any official hints about how the wall of secrecy around tax records was broken; it is unknown whether the IRS has found or closed any security gaps.
IRS keystroke-tracking systems are supposed to monitor access to taxpayer information so investigators can determine what happened. Government employees with official access to tax records who disclose them can face felony prosecution.
“I really am anxious to see some results here,” said Treasury Secretary Janet Yellen, who oversees the IRS, at a Senate hearing this month.
Without answers, the IRS risks further erosion of trust in the little-loved and sometimes-feared agency, which handles Americans’ sensitive financial information.
For years, the IRS has faced flat budgets and increasing responsibilities, leaving agency officials stretched thin as they try to improve information technology, enforcement and taxpayer service.
Ms. Yellen said investigations are under way by law-enforcement agencies and inspectors general, and that she hasn’t seen any information about what has been found.
The Treasury inspector general for tax administration, or Tigta, hasn’t confirmed the existence of an investigation.
The disclosures also spawned a promise of investigation last year from Attorney General Merrick Garland. The Justice Department declined to comment.
“Tigta neither confirms nor denies the existence of any action it may be taking with respect to any allegations of wrongdoing under its jurisdiction,” a spokesman said. “Tigta takes all such allegations seriously and takes any action it deems appropriate.”
IRS Commissioner Charles Rettig, appointed by former President Donald Trump, a Republican, has expressed frustration in several recent appearances over the probe’s slow pace.
At a House Oversight subcommittee hearing last month, Mr. Rettig said protecting taxpayers’ information is a priority. He noted that it would be a crime for someone to breach IRS systems but made clear that the origins of the disclosure haven’t been revealed.
“I don’t believe that…there has been a public statement that it actually was a leak or a breach from the Internal Revenue Service,” he said. “The delay in getting answers for the public certainly impacts the ability of the public to have trust and respect for the Internal Revenue Service.”
Sen. Mike Crapo (R., Idaho) and Rep. Kevin Brady (R., Texas), the top Republicans on the tax-writing committees, have pressed Ms. Yellen for answers.
“The American people remain in the dark about who was responsible and how the Treasury Department allowed it to happen,” they wrote to her in April.
ProPublica has provided limited details about how it obtained the data. It has said its reporters don’t know the identity of their source and authenticated information in part by comparing the data with publicly available records. It referred questions about the investigation to the Treasury Department.
While not all leaks of sensitive information are criminal, the Justice Department often targets those that are classified or contained in confidential financial disclosures, which are illegal under federal law.
The continuing investigation into the ProPublica leak comes amid an uproar over the leaked Supreme Court draft opinion overturning the landmark 1973 abortion-rights case Roe v. Wade, with experts in that case skeptical that the leak of such information qualifies as a crime.
But taxpayer information has specific legal protections, and government officials who have legal access to the data could face felony charges for disclosing it.
There is also a law against publishing private tax information; ProPublica said last year that it was aware of that law but didn’t believe it would be constitutional in instances where news organizations didn’t solicit the information or remove the data from the government itself.
Mr. Garland last year sharply limited federal prosecutors’ ability to obtain records of reporters’ contacts when investigating government leaks of sensitive information, saying the agency’s prior policies hadn’t properly weighed the national interest in protecting journalists from forced disclosure of sources.
But investigators have other methods in such cases, including seeking phone records of non-journalists.
The disclosures helped demonstrate when rich people pay taxes and when they don’t, and allowed ProPublica, starting last June, to detail strategies used by certain wealthy people to minimize tax bills.
That includes trusts, special provisions for real-estate investors, business losses and large Roth IRAs. Mr. Musk has called the reports misleading. An Amazon.com Inc. spokesman didn’t respond to a request for comment from Mr. Bezos.
Stephen Engelberg, ProPublica’s editor in chief, said Mr. Musk’s remarks have confirmed the accuracy of the reporting. He said Mr. Musk replied to inquiries with only a single question mark and hasn’t responded to subsequent questions.
Immediately after the records’ publication last June, some IRS experts said they assumed the agency’s keystroke-tracking system would lead investigators quickly to a culprit.
Tigta can and does use that system to find IRS employees with unauthorized access to records. Those investigations average 254 days, with time after that for IRS follow-up.
IRS employees are trained to be extra careful with taxpayers’ information. Signs warning about unauthorized access are prominent in agency buildings.
The IRS has investigated more than 1,700 employee misconduct cases involving unauthorized access over the past decade, with about 200 of those including investigations for disclosures, according to a new Government Accountability Office report.
Nearly 400 employees have been suspended, resigned or removed from their jobs due to those investigations.
One possibility is that the audit-trail system is incomplete. A 2020 Tigta report found that most audit-trail systems at the IRS weren’t recording or retaining full information for investigations.
It is also possible that the records left the IRS legally and disclosures happened after that. Under the law, IRS shares tax information with outside people and entities, including state officials, federal statistical agencies, academic researchers, prosecutors and Congress.
They are bound by the same confidentiality laws, but the pool of potential suspects is quite broad and doesn’t just include IRS workers.
“If it were from the IRS, you would have known that by now,” said former IRS Commissioner John Koskinen. “Because it would have been a tour de force to get all that out and not leave any trace at all.”
If an investigation concluded without a prosecution, the public may never know what happened. Prosecutors and investigators typically don’t announce that.
At some point, it would be helpful for the inspector general to offer more details, though that still might not undo the damage to the agency, said Dennis Ventry, former chairman of the IRS Advisory Council.
“This is corrosive both to morale at the IRS and corrosive to the trust in the IRS and the government. You just can’t sit around sucking your thumb,” Mr. Koskinen said. “This is not the usual case. This is a charge against 77,000 employees.”
Billions In New IRS Funding Won’t Be Easy To Spend
An $80 billion investment in the IRS, a pillar of Democrats’ climate bill, faces GOP opposition.
The Internal Revenue Service faces both political opposition and staffing challenges as it prepares for an $80 billion infusion to be spent over the coming decade.
The new funding is a key component of the climate, healthcare and tax legislation that President Biden is expected to soon sign into law.
Proponents say the money will increase government revenue by enhancing efforts to collect more owed taxes, digitize more of the agency’s operations and improve its ability to respond to taxpayers’ inquiries.
Republicans say the funding could fuel undue audits on many Americans, and their opposition means the money could be in jeopardy if the GOP wins control of the nation’s purse strings.
Meanwhile, the IRS could have a hard time hiring thousands of new tax lawyers, accountants and technology specialists at government pay levels in a competitive labor market.
“It’s a significant challenge, but it’s a lot more fun than trying to deal with less money,” said John Koskinen, a former IRS commissioner. “It’s obviously a sea change for the IRS after the last 10 or 12 years with budget cuts.”
Between 2010 and 2020, as Congress reduced the IRS budget, the agency lost a net 15% of its staff, hampering the number of audits it conducts and reducing the number of criminal investigations it opens by about half.
Paperwork backlogs have delayed millions of tax refunds, and only about one in 10 calls to the IRS got through to an employee earlier this year, according to the agency’s taxpayer advocate. The IRS declined to comment.
Republicans say the $46.5 billion in the legislation dedicated to enforcement efforts will translate into more audits for middle and low-income Americans.
House Minority Leader Kevin McCarthy (R., Calif.) said on Twitter Thursday that “Democrats in Washington plan to hire an army of 87,000 IRS agents so they can audit more Americans like you.”
The Biden administration and congressional Democrats have rejected the Republican criticisms. A Treasury Department official said many of the 87,000 new IRS staffers will replace more than 50,000 employees set to retire over the next decade and will serve in a variety of different roles, not just tax collection.
Former IRS officials also say technology funded by the money could also improve the accuracy of the agency’s audits, meaning it would less frequently target individuals or businesses that don’t have any tax issues.
Treasury Secretary Janet Yellen said in a letter this week to IRS Commissioner Charles Rettig that the $80 billion would be used partly to enforce tax laws against high earners, large corporations and complex partnerships that don’t pay what they owe.
She directed the IRS not to use any additional resources to increase the audit rate of households and small businesses with incomes below $400,000 a year.
Natasha Sarin, Treasury’s counselor for tax policy and implementation, said the IRS would lay out its plans for hiring and expanding the agency in the coming months.
The IRS gets the $80 billion lump sum this fiscal year, with 10 years to use it. The money is in addition to Congress’s annual budget appropriation, which was $12.6 billion this year.
“Are there risks associated with it? There are always risks and one of them is there are politics that chop it back and the other is they do stupid things with the money,” said Steven Miller, a former career IRS staffer who served as the acting commissioner in 2012. “If the House swings Republican, how long will that $80 billion be in the law?”
Republicans are favored to win control of the House in this year’s midterm elections.
Enhancing the agency’s enforcement efforts could raise the government’s net revenue over the next decade, according to several estimates.
The Congressional Budget Office projects the gain at roughly $120 billion between 2022 and 2031, while the Biden administration pegs it at roughly $400 billion. Mr. Rettig has said as much as $1 trillion in owed tax revenue is uncollected every year.
The highest-earning Americans have been subject to fewer audits in recent years, and the Treasury Department hopes to generate more revenue directly from high earners and indirectly by discouraging tax avoidance.
A report from the Government Accountability Office, a federal watchdog agency, found that while audit rates decreased for all income levels between 2010 and 2019, they fell most for taxpayers with higher incomes.
“The reason you’re seeing that statistic is not because the IRS is making choices to go after a certain type of taxpayer,” said Ms. Sarin. “It is because they do not have the resources today to be able to do the high-end work.”
Hiring and training the staff necessary to work on those audits, a process that can take years, as well as luring people to work on overhauling the agency’s technology, could prove difficult.
The IRS is already straining to hire entry-level employees to clear the backlog of paperwork. Ms. Sarin said the IRS first has to increase its human-resources staff so it can hire thousands of other employees over the decade.
Democrats wanted to include measures in the bill to let the IRS make some hires on an expedited basis and at a higher salary level. But Senate Republicans stripped the provisions on procedural grounds.
“One of the reasons that the government often struggles to be as effective as people want them to be is that there are limitations on simply how much they can pay compared to the private sector,” said Chye-Ching Huang, executive director of the Tax Law Center at New York University School of Law.
Nina Olson, a former national taxpayer advocate at the IRS under both Republican and Democratic administrations, said the legislation has the potential to improve taxpayers’ experience with the agency—as long as it is transparent about its plans and commits to making its services more accessible to Americans, rather than just focusing on collection efforts.
“This is needed,” she said. “But we need to see what they’re doing.”
Yes, The IRS Is Hiring Criminal Investigators Empowered To Use Deadly Force
IRS poised to get $80 billion in new funding over the coming decade if the Inflation Reduction Act passes.
The Internal Revenue Service’s operations are catching heat as the tax agency is in line for an $80 billion budget boost under the Democrats’ proposed spending plan — and now there’s intense attention being focused on IRS workers who actually pack heat.
It started as criticism from Republican leaders that the tax-collecting agency would bring on 87,000 new employees to “target regular, everyday Americans” with the $80 billion earmarked for the IRS in the Inflation Reduction Act reconciliation bill, which looks poised to become law. That’s a “misleading” claim, according to the Associated Press.
The bill passed Friday in a 220-207 vote of the House of Representatives and is now headed to President Joe Biden’s desk to be signed into law.
In recent days there’s been an online stir over job postings for IRS special agents who carry guns as part of their work with the IRS’s Criminal Investigation Division.
Though the job is really about sniffing out income and accounting irregularities to build legal cases, one of the potential duties is “conduct[ing] or participat[ing] in surveillance, armed escorts, dignitary protection, undercover operations, execution of search and arrest warrants, seizures, etc.,” the job listing states.
There are 300 vacancies for that role, which pays between $50,704 and $89,636 annually, according to the listing.
Though the job listing drew new attention this week, requiring some IRS special agents to potentially use deadly force is nothing new, an IRS criminal-investigation spokeswoman confirmed.
“The job description is consistent with previous special-agent announcements for the same position and consistent with announcements from other federal law-enforcement agencies,” the spokeswoman said, noting that the Criminal Investigation Division at the IRS is on its own the federal government’s sixth largest law-enforcement agency.
Following is some context on the special-agent listing and the broader debate over more funding for the IRS.
As a starting point, the estimate of the IRS’s bringing on 87,000 new employees came in 2021 from the Treasury Department, the AP noted. It would be a multiyear hiring plan and would encompass extra auditors plus an array of other jobs amid retirement and other IRS attrition, the AP added.
IRS ranks have been shrinking over the years. The IRS’s annual data book shows that in the last fiscal year it had almost 79,000 full-time workers, nearly a 13% decrease from fiscal 2012.
Data show the criminal division is a sliver of the IRS’s overall workforce. The division includes approximately 3,000 employees, with 2,100 being sworn agents, the spokeswoman noted.
As the agency’s workforce has decreased, so has the IRS’s audit rate among taxpayers at all income levels. Government data shows the decrease is especially sharp for higher earners.
More than half of the $80 billion in supplemental funding in the Inflation Reduction Act would be earmarked for more tax-compliance enforcement.
Officials, including Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, a Trump pick to lead the agency in 2018, have pledged that the extra enforcement would not be directed at small businesses or households making less than $400,000.
“Contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” Yellen said.
Three-quarters of voters say they are not personally worried about being audited by a better-funded IRS, according to a Morning Consult/Politico poll Wednesday. More than half, 56%, said they were not worried about more audits generally.
The Inflation Reduction Act now awaits Biden’s signature, and the Democratic president has previously said would sign the bill.
From that point, a fuller anticipation to lawmakers would be expected from the IRS later, tax experts said — and some worry there are still too few resources being devoted to helping regular taxpayers with questions.
The $80 billion — again, that’s spread over a decade — would be on top of annual budget appropriations for the agency. The debate over the funding is heated, with some observers saying the IRS needs every cent and others saying it needs no extra money.
For instance, Mark Everson, who served as IRS commissioner during the George W. Bush administration from 2003 to 2007, said the agency needs more money, but not at this magnitude. Extra, inflation-adjusted appropriations around 3% to 5% are a better bet for manageable growth, said Everson, vice chairman of alliantgroup, a specialty tax-services provider.
“The IRS needs to proceed extremely carefully as it ramps up,” he said, adding that “they’ve got to get the right people.” That holds true within the criminal division, he said.
The division itself is “a relatively small part of the agency, but it’s very important, both in terms of the role it plays for criminal tax problems and in support of other violations of law, including terrorism and corporate fraud.”
Criminal Investigation Division officials have to be involved in law-enforcement efforts because “financial information is frequently an important element of federal criminal investigations,” Everson said. “They play an essential role.”
The scandals and criminal cases surrounding WorldCom and Enron were two instances in which the division played an instrumental role, Everson said.
More recently, the division was involved in the 2013 takedown of the Silk Road underground website on which sales of drugs and illegal services were powered by the emergence of bitcoin as a payment means.
During fiscal 2021, the IRS completed almost 2,800 criminal investigations, with most resulting in referrals to prosecution. That included more than 1,000 cases related to tax crimes, like evasion; 979 financial-crime cases including money laundering; and 735 drug-related financial crimes.
The long view shows the drain on the Criminal Investigation Division, as well. In the 2011 fiscal year, the division completed nearly 4,700 investigations, according to IRS data.
IRS Sees Crypto Seizures Worth Billions of Dollars Next Year
* Tax Agents Seized $3.5 Billion In The Past Fiscal Year
* Infrastructure Law Gives Irs More Sight Into Crypto Trading
The Internal Revenue Service could seize cryptocurrency valued at billions of dollars that’s linked to tax fraud and other crimes in the coming year, according to the agency’s head of criminal investigations.
The IRS seized $3.5 billion worth of cryptocurrencies during fiscal year 2021, a figure that accounted for 93% of all the assets seized by tax enforcement that year, according to an IRS criminal investigation annual report published Thursday.
“I expect a trend of crypto seizures to continue as we move forward into fiscal year ‘22,” IRS Criminal Investigation Chief Jim Lee said on a call with reporters. “We’re seeing crypto involved in a number of our crimes as we move forward.”
In the past year, the IRS’s criminal unit seized billions of dollars worth of Bitcoin and other virtual currencies connected to cases involving a range of criminal activities, such as wire fraud, money laundering, the distribution of illegal narcotics, and tax fraud. That included $1 billion stolen from the Silk Road, an online Bitcoin exchange that was shut down in 2013.
The unit also prosecuted a former Microsoft Corp. software developer who used cryptocurrency to hide $10 million he embezzled from the company.
The Criminal Investigation unit “has prioritized training and the deployment of cryptocurrency, blockchain and open-source intelligence (OSINT) technologies to unravel complex cyber-financial criminal schemes,” the division said in its report.
To further advance those efforts, the unit is opening an Advanced Collaboration & Data Center in Northern Virginia in 2022.
Congress recently granted the IRS more ability to surveil cryptocurrency transactions in the infrastructure package President Joe Biden signed into law on Monday.
That law will require crypto brokers to track and report transactions to the IRS in an effort to give tax authorities more visibility into virtual currency trades.
The agency could also benefit from an additional $80 billion in funding that Democrats are proposing in Biden’s Build Back Better plan, which could get a vote in the House as soon as Thursday.
Lee said that money is desperately needed in his unit to hire more 250 to 300 more special agents, as well as invest in systems to identify and track cyber crimes.
Biden Is Hiring 87,000 New IRS Agents — And They’re Coming For You
The Internal Revenue Service is hiring a fleet of new agents. And they’re probably coming for you — regardless of your income level.
The Inflation Reduction Act, signed into law this month by President Joe Biden, empowers the IRS with nearly $80 billion in new funds. The world’s most powerful tax collection agency is using the money to go on a hiring spree to fuel much tougher enforcement efforts.
It is widely assumed that the audits will be brutal and widespread. Taxes start with tax returns, which must be signed under penalties of perjury. The Biden administration has said that the audits on steroids are for fat cats who have escaped having to pay their fair share for too long.
The administration has suggested the IRS would perform no new audits on anyone making less than $400,000 annually. Republicans tried to include that in the law, but every Senate Democrat voted against the amendment, as well as IRS audit protection for those earning less than $400,000.
In other words, American taxpayers at every income level are fair game regardless of income. So buckle up, and think about whether your taxes — and records — are vulnerable.
How would they look under a microscope? Tax returns must be signed under penalties of perjury. What’s more, if you try to change that language, the IRS says it doesn’t count as a tax return — which means your statute of limitations on an audit never begins. You can be audited forever.
Speaking of perjury, the IRS asks on every individual tax return, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
The 2022 version of that question is even more intrusive as we’ll see. The IRS says that all taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either “Yes” or “No” to the virtual currency question.
The question must be answered by all taxpayers, not just those who engaged in a virtual currency transaction in 2021.
The IRS agents hired to audit billionaires are authorized to use deadly force on you or even your dog based on their “opinion”. pic.twitter.com/autqppvql8
— Wall Street Silver (@WallStreetSilv) August 13, 2022
In the tax world, a simple yes or no question can be a surprisingly big deal — if you answer wrong. But can you check “No?”
Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box when they have not engaged in any transactions involving virtual currency during the year or limited their activities to:
* Holding Virtual Currency In Their Wallet Or Account;
* Transferring Virtual Currency Between Their Wallets Or Accounts;
* Purchasing Virtual Currency Using Real Currency, Including Purchases Using Real Currency On Electronic Platforms Such As Paypal And Venmo; And
* Engaging In A Combination Of Holding, Transferring Or Purchasing Virtual Currency As Described Above.
But Many People Must Check “Yes.” Just Think About These Everyday Transactions In Crypto, All Of Which Would Require Checking The “Yes” Box:
* The Receipt Of Virtual Currency As Payment For Goods Or Services Provided;
* The Receipt Or Transfer Of Virtual Currency For Free (Without Providing Any Consideration) That Does Not Qualify As A Bona Fide Gift;
* The Receipt Of New Virtual Currency As A Result Of Mining And Staking Activities;
* The Receipt Of Virtual Currency As A Result Of A Hard Fork;
* An Exchange Of Virtual Currency For Property, Goods Or Services;
* An Exchange/Trade Of Virtual Currency For Another Virtual Currency;
* A Sale Of Virtual Currency; And
* Any Other Disposition Of A Financial Interest In Virtual Currency.
Just answering yes or no isn’t hard, but one thing it’s meant to do is tip you off that you have a taxable event, which usually means paying some tax. So you also have to report the gain or income.
As if the crypto community wasn’t nervous enough, get ready for more since the tax stakes are going up again.
For 2022 tax returns, the IRS has modified the crypto question asked on IRS Form 1040, the tax form used for individuals. A draft of the 2022 IRS Form 1040 asks:
In case you thought the IRS needed 87,000 more agents to help you with your tax returns and audit billionaires, watch this: Highlights from the IRS Adrian recruiting project.
— Thomas Massie (@RepThomasMassie) August 17, 2022
“At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
That casts the net wider than did the prior version. The IRS gift and estate tax people are generally distinct from IRS income tax personnel.
But the expansion of the crypto tax question may herald more to come, more crypto audits, more IRS scrutiny on crypto and crypto taxpayers and more money being poured into IRS compliance generally.
The so-called Inflation Reduction Act is supposed to fund the hiring of 87,000 new IRS agents and add nearly $79 billion to the IRS, a vast $45 billion of which is being directed solely into IRS “enforcement.”
Crypto is one of the IRS’s big targets. The new law says the IRS will pursue “digital asset monitoring and compliance activities,” apart from general tax enforcement. What can the IRS do with $80 billion of taxpayer money?
The New Law Says The Irs Is Supposed To Use The Money In These Ways:
* Taxpayer Services: $3,181,500,000;
* Enforcement: $45,637,400,000;
* Operations Support: $25,326,400,000;
* Business Systems Modernization: $4,750,700,000;
* Task Force To Design Free, Direct E-File System: $15,000,000;
* Treasury Inspector General For Tax Administration: $403,000,000;
* Treasury Office Of Tax Policy: $104,533,803;
* Tax Court: $153,000,000; And
* Treasury Departmental Offices For Oversight And Implementation Support To Help The Irs Implement The Ira: $50,000,000.
Enforcement is the biggest line item, and Congress wants results too. Congress has already projected that adding IRS enforcement dollars is going to pay off. They project the new funding will add a whopping $124 billion more in increased collections over 10 years.
The bill is vague on how the IRS can spend $45 billion on “enforcement,” though ominously, it does mention legal and litigation support, and enforcement of criminal statutes regarding tax law violations.
The bill also specifies “digital asset monitoring and compliance activities” and investigative technology for criminal investigations as items on which the IRS should spend the money. Any way you slice it, you can expect more IRS attention on crypto, more scrutiny on tax reporting, and above all, more audits.
What $80 Billion More For The IRS Means For Your Taxes
The Inflation Reduction Act won’t bring 87,000 new IRS agents with guns to your front door, but it has important changes for taxpayers.
The last Tax Report came out just as Congress took up the Inflation Reduction Act, and it discussed the bill’s $80 billion in proposed new Internal Revenue Service funding.
Over half the new dollars were earmarked for new tax enforcement, especially audits of high-earning taxpayers, while the rest was to improve operations, technology and taxpayer service.
Now the bill is law, signed by President Biden on Aug. 16. Although details changed, the IRS’s $80 billion in new funding survived and is in place to be spent over a decade.
Supporters of the law, who have long complained that IRS appropriations have been too erratic to fix fundamental problems like 1960s-era technology, are pleased with the stable funding.
The bill’s passage means there’s more for taxpayers to know, both to counteract recent wild claims and to prepare for what’s ahead. Here are highlights.
There Won’t Be 87,000 New IRS Agents With Guns
According to the Treasury Department’s plan, part of the new funding will go to hire 87,000 workers over 10 years. This figure includes all hires, such as customer service reps and tech workers as well as agents.
It doesn’t take into account that due to the IRS’s aging workforce, more than 50,000 retirements and other departures are expected in coming years.
Some of the funding’s opponents have said the 87,000 hires will be armed. According to an IRS spokesman, the only agency staffers allowed to carry guns are 2,100 special agents in the criminal investigation division, and they make up less than 3% of the total current IRS workforce of about 80,000.
According to Natasha Sarin, a Treasury official overseeing the IRS, about 1,000 of the hires will be special agents, with many replacing departing agents. In the late 1990s, the agency had 3,500 special agents.
Funding Could Shift
The new $80 billion for the IRS over ten years is on top of the agency’s annual funding, which for fiscal 2022 is about $13 billion. Congress will continue to make annual appropriations for the IRS, and the party in charge could alter them.
For example, lawmakers could shift annual allocations so that less goes to enforcement and more to customer service. They could also cut or raise this funding.
The Inflation Reduction Act doesn’t directly address the crushing IRS backlog—but Congress is on it
The $80 billion seeks to rebuild the IRS after years of lower funding. Meanwhile the agency has a backlog of about 17 million unprocessed paper tax returns for individuals and businesses plus correspondence it’s behind on, in part due to the pandemic.
Earlier this year IRS Commissioner Chuck Rettig said he expected this situation to be “healthy” by year-end. But with the IRS processing about 500,000 returns per week at best and more coming by Oct. 17, the math isn’t favorable.
However, on Aug. 17 National Taxpayer Advocate Erin Collins said the weekly number of processed returns is rising.
This past week, a bipartisan group of Congress members sent a stern letter to Mr. Rettig asking for more backlog details. The letter also urged the IRS to extend the suspension of automated collections and notices, which were paused earlier because the agency couldn’t process mail from taxpayers. Stay tuned.
More Audits Are Coming, But Not Soon
It will take time for the IRS to staff up, especially in a tight labor market. By one estimate, new agents aren’t fully productive for three to five years.
The Treasury Department has pledged to use the new funding to focus on tax underpayments by higher-income people. Their returns are often more complex than lower earners’ returns, and the IRS needs to devise new audit methods.
About The Audit Threshold Of $400,000 Of Income
Treasury and IRS officials have said the new funds for tax enforcement won’t increase audits on filers making less than $400,000, which some have called into question.
On Aug. 10, Treasury Secretary Janet Yellen sent a letter to the IRS with more specifics. It says the new funding “shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.”
The Treasury directive leaves room for audits of taxpayers claiming, say, $300,000 of income that have another $200,000 of unreported income.
The bottom line, says Ms. Sarin: “For honest taxpayers earning less than $400,000, the chances of being audited are going down.”
Ms. Yellen’s directive isn’t binding on future administrations.
An ‘Audit’ Isn’t Always An Audit
Many filers think any contact with the IRS is an audit, but it’s not. In a true audit, the agency examines a taxpayer’s records and requires proof of income, deductions or credits on the return.
What isn’t an audit? Among other things, a letter saying a filer omitted income paid by a bank or employer, or a “math-error notice” that assesses tax for a mistake detected by an IRS computer. Still, these issues can be scary and require a taxpayer response.
With better IRS systems and the end of the backlog, it should be easier to resolve these issues, but taxpayers who encounter them shouldn’t think they’re evidence of rising audit rates.
If You’re Thinking Of Putting Your Tax House In Order…
Some pertinent information: The statute of limitations is three years for routine issues and six years for many major ones, but the clock doesn’t start to run until a return is filed. As of Oct. 1, the interest rate on most tax underpayments rises to an annual equivalent of 6%. This rate resets quarterly, so people with overdue tax payments can still benefit from lower rates for prior quarters.
Want A Better IRS? Simplify The Tax Code
The biggest problem facing the IRS isn’t bad management or lack of resources, but the metastasizing complexity of the tax rules it must administer.
One of the most conspicuous parts of the tax-and-spending package known as the Inflation Reduction Act is vastly expanded funding for the Internal Revenue Service.
The promised flood of cash — an additional $80 billion over ten years, compared with baseline annual spending of around $15 billion — raises some questions, and one of the most important is getting less attention than it should.
If the IRS lacks the means to do its job well, could that be because its job is far more demanding than it ought to be?
In a word, yes: The IRS struggles to administer the system because US taxes are insanely complicated. In this respect, the purportedly bold innovation on funding for the agency is partly a tribute to the status quo. The enormous increase in spending is combined with another new batch of complexities.
Highlights include incentives for climate-related investments and assorted other good things, and a minimum corporate tax that requires eligible companies to calculate what they owe not one way but two, then pay the larger sum.
Changes like these serve legitimate purposes, but they are partly self-defeating. With one hand you incentivize decisions that serve the public interest; with the other, you cancel them out by closing “loopholes.”
On top of which, every further complication is an opportunity for tax avoidance, an added compliance burden on taxpayers and the IRS alike, and a transfer of income from producers of socially valuable goods and services to accountants and lawyers eager for their share of the resulting deadweight loss.
The US tax code hasn’t been comprehensively simplified since 1986. Over the subsequent years, Congress has indulged its unlimited appetite for making it unintelligible.
(Back in 2010, a panel chaired by Paul Volcker reported that taxpayers and businesses spend 7.6 billion hours and “significant out-of-pocket expenses” to do their taxes each year, a cost equivalent to at least $140 billion, which was 12 times the IRS budget or 10 cents per dollar of income tax paid.) What a mess. And what a shame that the new IRS budget isn’t part of a plan to fix it.
In a narrow sense, the extra spending does make sense. My colleague Tyler Cowen argues that the IRS is badly run and should be told to smarten up before it gets more money — a fair point, given the agency’s failure to modernize its systems and make better use of its existing resources.
But the squeeze on its budget (a cut of about a fifth in real terms since 2010) and the relentless rise in its workload (lately aggravated by the pandemic) would test any undertaking, especially one that was stressed to begin with.
Although the bigger budget will raise more revenue than it costs, there is much debate over just how big this bonus — revenue available to pay for more public spending and/or lower tax rates — will be.
The Congressional Budget Office estimates that the $80 billion will raise about $200 billion in additional revenues. Larry Summers and Natasha Sarin (who now works in the administration) explain that the methodology behind such estimates ignores or plays down the effects of better taxpayer service, updated technology and better voluntary compliance.
The IRS reckons the gap between what’s owed and what’s collected is roughly $7 trillion over 10 years; Summers and Sarin think the extra funding should easily cut that by $1 trillion.
Their arithmetic looks plausible — only keep in mind that the tax gap is not the best way to judge the system. The compliance burden is a cost in its own right, and if you cut the gap by increasing the burden, it’s a mixed blessing.
The goal should be to cut the gap while reducing the burden. That’s entirely possible, and you do it by simplifying the code.
One example should suffice. The US provides tax relief for certain kinds of retirement saving. Security in retirement for people who might otherwise lack it is a worthy purpose, and most countries offer tax-advantaged treatment for those on middle and low incomes.
But none that I know of rival the US for the Kafkaesque convolutions of its approach (many of which conspire, it so happens, to narrow the benefits to those with high incomes and accountants on retainer).
Some employer-based schemes — 401(k)s, 403(b)s and so on — are relatively straightforward. But then you’ve got Individual Retirement Accounts: “traditional IRAs” (including “Stretch IRAs”), Roth IRAs (not forgetting “Back-Door Roths”), Payroll Deduction IRAs, Simplified Employee Pensions, “SIMPLE IRAs” (it stands for Savings Incentive Match Plan for Employees), and SARSEPs (Salary Reduction Simplified Employee Pension Plan).
Now, if all those very simple simplified schemes strike you in fact as a bit complicated, brace yourself and look at the IRS page explaining the rules for drawing down these accounts.
Be sure to follow the links! You wouldn’t want to make a mistake — especially now that your chances of being audited are about to go up.
For decades, whenever Congress has “reformed” the tax code, it has just layered on new complications. The US now has a system that might have been designed to fail, incentivize avoidance, perpetuate a colossal tax gap, and drive taxpayers and IRS officials alike out of their minds.
The biggest problem with the IRS is not that it’s been badly managed (though perhaps it has been) or under-resourced (which it undoubtedly has been), but that hyperactive legislators have given it an impossible task. Sadly, $80 billion won’t come close to putting that right.
IRS Has Opened 20 Russia Sanctions-Related Criminal Probes
The agency’s criminal investigation division, part of Task Force KleptoCapture, said it had identified nearly 50 individuals and entities for possible enforcement actions.
The Internal Revenue Service has opened 20 criminal investigations in its crackdown on the evasion of sanctions that the U.S. imposed after Russia’s invasion of Ukraine, an official said.
The law-enforcement unit at the tax-collection agency opened the probes as part of its work with Task Force KleptoCapture and continues to develop new leads, Guy Ficco, the criminal investigation division’s deputy chief, said at a press conference Thursday.
The IRS has taken a leading role in the task force, but the 20 investigations cited aren’t the total number of probes by all task force members, Mr. Ficco said.
The agency in an annual report said it had identified nearly 50 possible individuals and entities for possible sanctions enforcement actions as of Sept. 30.
KleptoCapture, a multiagency task force established in March, works to enforce a sweeping set of sanctions and export controls that the U.S. and its allies put in place in response to Russia’s invasion of Ukraine earlier this year.
The task force, which is headed by the U.S. Justice Department, includes agents from a half-dozen federal law-enforcement agencies, including the Federal Bureau of Investigation, Marshals Service, Secret Service, Department of Homeland Security and the Postal Inspection Service.
Mr. Ficco said the IRS has used a variety of methods to try to develop new leads for sanctions violators, including data analytics, intelligence sharing with international partners and reviewing suspicious activity reports filed by financial institutions.
The division partners particularly closely with authorities in the U.K., Canada, Australia and the Netherlands.
The IRS’s criminal investigation division expects to significantly increase its number of special agents, said division chief Jim Lee.
About 91% of IRS criminal investigation cases referred to prosecutors lead to convictions, Mr. Lee said. “If you violate the law and end up in the crosshairs of an IRS-CI special agent, you are likely going to jail,” he said.
IRS Prepares For An Increase In Crypto Cases In The Upcoming Tax Season
The criminal investigation division of the IRS says it is preparing hundreds of crypto-related cases for the upcoming tax season.
The United States Internal Revenue Service (IRS) criminal investigation division is ramping up for tax season with its sights set on the crypto community.
According to a report from Bloomberg Law, the division chief Jim Lee said they are preparing “hundreds” of crypto-involved cases, many of which will soon be available to the public.
Lee said in the last three years, there has been a major shift in digital asset investigations conducted by the IRS. Previously these investigations were mostly money-laundering related, whereas now tax-related cases make up nearly half.
This includes what is often called “off-ramping” transactions where digital assets are exchanged for a fiat currency, along with not reporting crypto payments.
In a different report released by the agency on Nov. 3, the IRS reported that in 2022 the 2,077 special agents of the division spent nearly 70% of their time investigating tax-related crimes like tax evasion and tax fraud. While the other 30% was spent on money laundering and drug trafficking cases.
The division chief said following the money is nothing new and they’re ready to pivot into new realms, including Web3:
“We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse.”
The report cited a crypto-related case as an example, which involved tracing billions of dollars in Bitcoin stolen from Bitfinex after its 2016 hack and led to the arrest of two individuals.
This comes after the IRS introduced a broader “Digital Assets” category ahead of the upcoming tax season. It grouped cryptocurrencies, stablecoins and nonfungible tokens (NFTs) all together under a new “Digital Asset” category.
As decentralized financial technologies and assets become more mainstream, regulators are reacting, therefore enforcing more reporting requirements.
Binance has been actively holding workshops for global regulators to better understand digital assets and their implications. These activities increased after the exchange hired a prominent IRS cybercrime investigator to lead its anti-crime unit.
International Deal To Combat Crypto Tax Evasion To Start 2027 As 48 Countries Sign Up
Several countries with a sizeable interest in crypto, such as Turkey, India, China, Russia and all African nations, are not signatories to the statement.
As many as 48 countries committed to a tax-transparency standard starting in 2027 that will provide for the automatic exchange of information between jurisdictions to combat tax evasion on crypto exchanges, according to a joint statement and individual announcements by the U.K., Singapore, and Luxembourg.
The agreement adds the Organisation for Economic Co-operation and Development’s (OECD) Crypto-Asset Reporting Framework (CARF), which was finalized in June, to the organization’s Common Reporting Standard (CRS), an information standard for the automatic exchange of information regarding financial accounts between tax authorities.
“Final agreement on the CARF was reached in March 2023, following two years of negotiation,” according to the release from the U.K. “The U.K. leads on first of its kind global commitment to combat offshore crypto tax evasion.
It will mean crypto platforms will need to start sharing taxpayer information with tax authorities, which currently they do not do, ensuring these authorities can exchange information to enforce tax compliance.”
The 2027 deadline for implementation also applies to the updates in the Common Reporting Standard with the aim of “swiftly transposing the CARF into domestic law and activating exchange agreements in time for exchanges to commence by 2027, subject to national legislative procedures.”
Several nations with a sizeable interest in crypto, such as Turkey, India, China, Russia and all African countries, are not signatories to the statement.
“We invite other jurisdictions to join us with a view to enhancing the global system of automatic information exchange which leaves no hiding places for tax evasion,” the statement said.