IRS Cracks Down on Cryptocurrency

The United States Internal Revenue Service has honed in on a new tax evasion target: cryptocurrency users. The agency reportedly assigned several of its elite agents to investigate the use of Bitcoin and other cryptocurrencies as a means of tax evasion.

According to the IRS, there is a suspicion that the anonymity offered by cryptocurrency has lured not only drug dealers and money launders but also tax cheats. The IRS says that despite significant increases in the popularity of cryptocurrencies, very few people report financial gains from them on their tax returns.

“It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” Don Fort, chief of the IRS Criminal Investigations Division, told media outlets in early February.

The IRS has reportedly focused its efforts on cryptocurrency users trading large quantities of the digital currency. In late November 2017, a federal judge in San Francisco ordered Coinbase – one of the most prominent cryptocurrency exchange sites globally – to hand over the identities of any user who exchanged more than $20,000 annually of cryptocurrency between 2013 and 2015 in response to an IRS request for information about certain Coinbase users. The IRS estimates that only around 900 people reported financial gains from cryptocurrencies on their tax returns in those years – in spite of the fact that an estimated 14,000 Coinbase users either bought, sold, received, or sent over $20,000 of cryptocurrencies in that same period. Following the ruling, Coinbase was forced to hand over a host of information related to over 10,000 user accounts, including each user’s name, taxpayer ID number, transaction logs, date of birth, address, and account statements.

However, many point out that the underreporting of financial gain from cryptocurrencies isn’t always the result of an intent to evade tax responsibilities. Sometimes, it is just the product of confusion. There often isn’t a clear way for investors to figure out what they owe in taxes and how much

“There are some good reasons people are confused,” tax expert Frank Chaparro explained in Business Insider. “For the most part, cryptocurrency exchanges do not send customers tax forms, such as a 1099-DIV, which informs investors how much they made from selling investments during the year. Without a 1099-DIV, it’s up to the investor to figure out how much they made from selling cryptocurrencies during the year and how much they’ll owe in taxes.”

So, what should cryptocurrency users who may have underreported or failed to report their cryptocurrency gains to the IRS do now? Well, if you think you might owe taxes on a transaction, your best bet is to be proactive. Not only are those who don’t report gains at risk of a big tax bill, they may also have financial penalties and, in some serious situations, potentially even criminal charges for tax evasion.

Generally, if you face any kind of risk, it is best to consult a tax attorney and make contact with the IRS before they come knocking on your door. The longer you wait to address the situation, the hotter the water you might find yourself in.