The IRS sent out a statement of work (SOW) on May 12 requesting help from independent consultants to crack down on cryptocurrency tax non-compliance. According to the SOW, the IRS is seeking help from technology companies with crypto tax software to reconcile taxpayers’ reported cryptocurrency gains and losses on the tax returns. The process includes using software to systematically obtain cryptocurrency transactions data through exchanges, wallets, API keys, blockchain data, and other sources and creating a detailed tax report for the taxpayers under consideration. It would compare information reported by taxpayers on their tax returns with the software-generated output from technology consultants. Discrepancies might trigger conversations or audits with the taxpayers. Taxpayers subject to this process could range from small taxpayers to sophisticated traders. The SOW states, “Taxpayer transactions can be relatively simple, or in some instances, they can have hundreds of thousands of digital asset transactions in a year.”
The IRS is aware of how the cryptocurrency tax issues. They know that cryptocurrency exchanges and subpoenas are just the first step in clamping down on cryptocurrency tax evasion, and are now evolving to the next phase of enforcement by leveraging software to get a full picture of crypto users’ tax profiles.
Therefore, those users who have failed to report — or underreported — their cryptocurrency taxes could still find a reputable cryptocurrency tax software and come into voluntary compliance before the IRS comes to them.
The IRS considers cryptocurrencies as property, just like collectible coins, valuable paintings, vintage cars, or stocks. Property can appreciate or depreciate in value. Taxpayers must report all cryptocurrency transactions and all cryptocurrency, or digital currency income even if you didn’t receive a tax form from a cryptocurrency exchange. Some exchanges, such as the popular site Coinbase, provide a transaction history to every customer, they only provide an IRS Form 1099-K to those customers whose transactions meet a certain dollar amount. According to the IRS “A Form 1099-K includes the gross amount of all reportable payment transactions, and you will receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions.”
The IRS requires you to report your gains and losses on each of your cryptocurrency transactions. You report cryptocurrency transactions at their fair market value in U.S. dollars.
Jeffrey Newman represents whistleblowers nationwide including whistleblowers revealing cryptocurrency tax evasion by companies and persons. He can be reached at Jeff@JeffNewmanLaw or at 617-823-3217.