The IRS Sets a Trap for Cryptocurrency Tax Cheats

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Hanna
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Joined: Sun Oct 15, 2006 8:11 pm

The IRS Sets a Trap for Cryptocurrency Tax Cheats

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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.

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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.

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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.

https://www.wsj.com/articles/the-irs-se ... 1601026202 (subscription)
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