Based on recent IRS behavior, it seems like the organization plans to focus on digital asset audits. Throughout 2019, it was evident that the IRS was getting more familiar with the industry. Recently, the IRS has sought consulting from top digital asset accounting firms. The IRS is making it clear that they plan to target cryptocurrency investors / traders like never before.
Cryptocurrency Tax Treatment
The general tax treatment for digital assets can be quite complex. Any person that is using digital assets should always seek a tax professional. In the original IRS Notice 2014-21, it was outlined that for federal tax purposes, “virtual currency” is considered “property” opposed to “currency.” This is positive for digital assets, because they essentially receive more favorable tax treatments. Instead of applying “ordinary income” rates, virtual currencies fall under more favorable capital gain / loss treatment. In terms of personal income, activities like mining digital assets or being paid in them can trigger ordinary income taxes.
Popular Taxable Events In Crypto:
- Earning cryptocurrency as a form of income
- Using cryptocurrency for goods or services
- Trading cryptocurrency to cryptocurrency ( ex. converting btc into eth )
- Converting a cryptocurrency to fiat
Popular Non-Taxable Events In Crypto:
- Transferring crypto ( moving from one exchange to another, as long as you don’t sell )
- Giving digital assets as a gift to somebody else
- Buying digital assets with fiat ( only buying doesn’t trigger a taxable event )
Signs That The IRS Is Cracking Down
According to recent reports, the IRS has been seeking consulting services from large players in the digital asset accounting space. CryptoTrader.Tax is one of the many companies that the IRS is trying to create relations with. The IRS can speed up operations if they receive consulting services from established players. According to a blog post by CryptoTrader.Tax , the IRS wrote the following:
“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. Attached is a sample Statement of Work describing the types of services we are looking for. I wanted to make you aware of our efforts in case your company has any interest in pursuing this type of work.”
It’s important to note that CryptoTrader.Tax does not plan to work with the IRS based on their blog post. CryptoTrader.Tax is one of the most popular tax solutions in crypto. The platform essentially connects to every exchange and manually imports investment data for traders / investors. The platform then assesses the data to provide overall tax liabilities. In addition, the platform can be directly integrated to popular tax filing protocols like TurboTax & TaxAct.
How This Momentum Built Up
It was obvious that the IRS was laser focused on the digital asset space in 2019. The financial institution has arguably been slow to regulate the industry. With Bitcoin being around for 11 years, it seems like the IRS is just starting to take taxation more seriously. Towards the end of 2019, we saw many strategic moves by the entity. In November of last year, it was reported that the IRS planned to investigate cryptocurrency and ATM kiosks. Bitcoin ATMs have become quite popular in the last few years. User growth has pushed up demand for new installations across the globe. According to studies, Bitcoin Installations has nearly doubled since 2019. Aside from basic user information, it seems like the IRS was interested in investigating ATMs from a money laundering angle as well.
In December of 2019, it was also reported that the IRS has introduced new tax forms that would specifically target cryptocurrency users. The updated tax forms would now ask filers if “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” This announcement was extremely relevant, because it was basically the IRS telling filers that they plan to crack down on cryptocurrency use. Despite this being a yes or no question, there’s numerous activities that could justify one or the other. This is why it was crucial that digital asset users were seeking tax advice.
It will be interesting to see the connection between crypto and audits, in terms of IRS volume in 2020. With the way the tax code is structured, this could be relatively hard to assess. The reason for this is because the IRS usually has 3 years from a filing to flag a return. People who filed taxes in 2016 are still liable to receive an audit in 2020 based on the code. You might not see a huge spike in 2020, but with the IRS actions in 2019 and their recent outreach to cryptocurrency accounting firms, it's obvious that the institution plans to make a splash in the near future.
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