While cryptocurrency transactions have yet to hit the IRS’s top list of tax scams, the agency has been watching the market for the past few years and making advances toward ensuring cryptocurrency transactions get reported and related taxes paid. From requiring taxpayers to note crypto transactions on their 1040 to summoning dealers to reveal information on individuals with large crypto dealings, the IRS is honing in on cryptocurrency, and virtual currency in general, as an area of underreported income and potential tax revenue.
What is Cryptocurrency?
Cryptocurrency is a type of virtual currency that can be used to buy goods and services. It uses cryptography to secure transactions, which in turn are recorded on a digital distributed ledger. Crypto currency can be bought and sold as well, like stocks and other investments. Bitcoin is one of the thousands of types of cryptocurrency bought and sold each day.
In 2014, the IRS issued a notice explaining that cryptocurrency as well as other types of virtual currency would be considered property and treated as such from a tax perspective. That means when cryptocurrency is bought or sold, taxpayers are to report a long- or short-term gain based on the length of time they held the currency. As with stocks, cryptocurrency held for more than a year before being sold would result in a long-term gain or loss and be taxed as such.
Taxpayers who are paid in cryptocurrency are to report it as income. If self-employed, the taxpayer must pay self-employment tax on the cryptocurrency earnings just as they would if paid in dollars. As with any income or expense, the IRS advises taxpayers to keep scrupulous records to document any cryptocurrency transactions and to establish fair market values.
Recent IRS Moves to Track Cryptocurrency Transactions
As part of its efforts to ensure individuals are reporting cryptocurrency transactions and paying appropriate taxes, the IRS began asking taxpayers about virtual currency transactions on their 2020 federal income tax form. Taxpayers were required to answer a yes or no question regarding whether they had received, sold, sent, exchanged, or otherwise acquired a financial interest in any virtual currency at any time during the year. The 2021 form will also ask whether taxpayers otherwise disposed of virtual currency.
The Biden administration has also made it a priority to increase cryptocurrency reporting rules and hopefully garner more tax revenue as a result. One such move is a provision in the Infrastructure Bill that requires cryptocurrency brokers to report customers’ cryptocurrency gains to the IRS. The bill does not define “broker,” and detailed guidelines from the US Treasury are not expected until after the bill is passed by Congress and signed by President Biden.
In the meantime, the IRS has ramped up its own efforts to gather information about taxpayers from cryptocurrency dealers. This spring, the agency was authorized to serve John Doe summons (a means by which the IRS can compel information concerning a group of taxpayers without having to name individuals) to two exchange operators requiring them to release information on individuals who had conducted at least $20,000 in cryptocurrency transactions between 2016 and 2020. The IRS used the same type of summons with a different operator in 2016 to go after taxpayers with under- or unreported cryptocurrency gains from 2013 to 2016.
In 2019, the agency sent letters to more than 10,000 taxpayers with virtual currency transactions, advising them that they had potentially failed to report or underreported income and therefore underpaid taxes. At the time, the IRS announced it had begun using data analytics to identify taxpayers who were not reporting income related to cryptocurrency.
Operation Hidden Treasure
The IRS has also made identifying cryptocurrency transactions and related underreported income a priority of the Criminal Investigation Division. Earlier this year, the agency added a dedicated team deemed Operation Hidden Treasure. The team is made up of agents skilled at tracking cryptocurrency and other virtual currency. The team will focus on identifying taxpayers who have left cryptocurrency transactions off their tax returns.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
If you have been contacted by the IRS about cryptocurrency transactions or are concerned you failed to report virtual currency income correctly, we can help. The experienced tax attorneys at Wiggam & Geer can evaluate your situation and recommend a course of action, as well as represent you before the IRS. Contact Metro Atlanta’s top tax attorneys by clicking here or calling (404) 233-9800.