Cryptocurrency investment and usage has acquired significant momentum over the past years, and the IRS is now cracking down on income tax compliance. With more individuals taking profit of their cryptocurrencies such as mining, staking and other rewards earned from participating in different cryptocurrency protocols, government agencies are taking closer notice of the industry. The IRS in particular has ramped up its cryptocurrency tax enforcement efforts over the past months.
The recent cryptocurrency tax enforcement efforts from the IRS and how they affect investors are summarized here.
The IRS started its crypto tax compliance crusade by sending out over 10,000 letters to investors suspected of inaccurately reporting their crypto activity. Certain versions of these letters were “no-action” letters and simply acted as a warning alerting the recipient that the IRS was aware of their crypto activity and that they needed to be properly reporting the related income on their tax return.
Other versions of these letters were not as relaxed and needed action as well as an immediate response from the investor.
In October, for the first time in over five years, the IRS released new guidance on how cryptocurrencies are to be treated from a tax perspective. Along with this guidance came a lengthy FAQ addressing common questions having to do with cryptocurrency tax reporting. This was a key moment for investors and crypto companies alike as the IRS provided further clarity on cryptocurrency forks, air drops and appropriate cost basis methods.
The most notable and weighted action taken by the IRS over the past year was the modification of Form Schedule 1 to include a “catch all” question requiring cryptocurrency investors, holders and users to officially affirm or deny their involvement with cryptocurrencies. This question was officially added to the top of Form Schedule 1, which is a form all American taxpayers must to complete. By making all American taxpayers answer this question, the IRS positioned itself to criminally prosecute those who willingly answered the question untruthfully.
Most recently, the IRS released a statement of work and started soliciting private cryptocurrency tax software companies to aid in the audit efforts of individual taxpayers.
This announcement made clear that the IRS has begun investing heavily in resources that will enable it to accurately assess whether investos are properly reporting their cryptocurrency-related gains, losses and other income on their tax returns. According to the statement of work, the IRS wants to find instances when “the taxpayer’s data is inconsistent from what would be expected from normal accounting practices.”
What This Means For Crypto Investors
It’s obvious the IRS is ramping up cryptocurrency tax enforcement, so investors should be accurately reporting all crypto gains, losses and income with their taxes each year. As cryptocurrency transaction data is often fragmented across multiple exchanges, wallets and various platforms, crypto investors should be keeping exact records of their transactions. Cryptocurrency tax software tools can help with record keeping; however, old-fashioned spreadsheets can also do the trick.