Cryptocurrency taxes have been a bit of a gray area over the past few years. Many virtual currency investors didn’t know how to report their coin trades on their individual tax returns, and many more didn’t know that crypto income had to be reported at all. As a result, relatively few crypto traders have properly reported their taxable virtual currency activities to the IRS.
The IRS has a lot of information that strongly suggests the cryptocurrency community has massively underpaid crypto income taxes since at least 2013. The Treasury is owed millions, and the IRS has renewed efforts to get its hands on the missing tax revenues. The agency recently launched a special crypto tax enforcement unit, and it just successfully resolved litigation against Coinbase, America’s most popular Bitcoin exchange. However, some tax policy experts question whether this is enough. Instead, they are calling for a temporary amnesty period to give crypto investors an opportunity to correct their returns and pay any additional taxes they may owe.
Crypto Tax Enforcement on the Rise
Today, millions of Americans actively trade virtual currencies. However, the IRS receives very few reports of taxable cryptocurrency transactions. The IRS first laid out its crypto tax policy in 2014, but since that time very few taxpayers have actually paid taxes on their virtual currency income. In fact, the IRS received only about 800 tax returns reporting cryptocurrency financial activity in 2015.
Among cryptocurrency investors, there is a sense – or more like a misplaced belief – of safety in numbers. After all, if nearly every one of the millions of coin trading taxpayers fails to properly report their taxable trades to the IRS, there’s no way the agency could detect and prosecute them all. Unfortunately, however, there is no safe haven from the IRS. The tax agency has up to three years to call up your returns for an audit, and this time extends to six years of inaccuracies are found. And of course, there is no statute of limitations for criminal tax fraud and evasion, so you can be tried for these crimes at any time.
As the tax agency continues to work through various strategies to detect and deter tax evasion and related virtual currency crimes, the IRS has taken several approaches. Recently, the IRS contracted blockchain analysis group Chainalysis to track and analyze blockchain transactions. The IRS is working hard to identify likely tax evaders within the crypto community to bring them to justice, but at the end of the day the government mostly just wants its money. As a result, many crypto tax experts believe that an amnesty program may be the IRS’s next move.
Crypto Tax Amnesty May Be Next
The IRS has ramped up its crypto tax enforcement relatively quickly, but that’s not the only way it can get its hands on missing tax revenues. The tax agency could encourage taxpayers to correct prior years’ returns by creating a special amnesty program. If the IRS does decide to take this approach, it will more than likely set forth a standard fee schedule for any cryptocurrency investors who wish to come forward to clear up inaccuracies on their returns. Such a program would be similar to the IRS safe harbor policies currently applied to offshore account holders – essentially, investors would be invited to come clean about errors in their tax filings in exchange for pre-determined penalties and a promise that no further prosecutions would be brought.
If it does grant amnesty, the IRS will be taking a “carrot-and-stick” approach to reigning in crypto tax evasion. The amnesty would be the incentive, whereas the increasing likelihood of being caught for criminal tax evasion is the stick. The IRS employs thousands of auditors trained to detect inaccuracies and false statements on individual tax returns. Now, the agency has directed many of these agents to focus entirely on possible cases of crypto tax evasion, money laundering, or other virtual currency-based financial crimes.
With new software and industry partners available to support crypto tax investigations, it will only become increasingly difficult to avoid IRS scrutiny. As a result, anyone who wants to make sure they are minimizing their future tax liability is well advised to contact a trained cryptocurrency accountant. A skilled professional can help you plan your transactions in a manner that limits your tax bill and makes sure you don’t catch unwanted attention from the IRS this tax season.
About the Author
Mario “The Problem Solver” Costanz is a lifelong entrepreneur and has had built and sold a number of successful businesses in the internet, restaurant, real estate, and income tax preparation industry. He was named to the “One to Watch” section of Accounting Today’s 2017 Top 100 Most Influential in Accounting List. More information and contact can be found at https://CryptoTaxPrep.com and https://linkedin.com/in/mariocostanz.