The IRS ‘s crypto-reporting rule , which took effect last week, is the latest development in the government’s ongoing campaign to curb cryptocurrency. The IRS is a behemoth that has proven itself capable of breaking into the privacy and security of millions of Americans, as well as squeezing the life out of small businesses and innovators. So now it’s going after the cryptocurrency crowd, too?
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Two weeks ago, the IRS released a new report on cryptocurrencies and tax evasion. It made tons of headlines, and was described as “groundbreaking,” “historic,” “rooted in research,” and “incredibly comprehensive.” What it actually was, and what it means for the industry, is a bit different.
Last week, the Internal Revenue Service, the country’s tax collecting body, quietly posted a new guidance document on how it will treat information about cryptocurrencies under the agency’s tax code. The document, which was posted on the agency’s website but not immediately available to the public, was posted on March 18 and published online March 25, and was flagged by the Wall Street Journal on April 2.. Read more about irs crypto question and let us know what you think.
The U.S. Internal Revenue Service classifies cryptocurrencies as property, which means you can pay taxes every time you use a cryptocurrency to buy something. You can use it to pay for an electric Tesla car – oh, sorry, you can’t do that anymore -, a cup of coffee, or even a castle in Europe. You can pay someone for their services as an independent contractor or as an employee. But whatever the transaction, you can make a profit or a loss, which is completely separate from the income tax consequences of the person you are paying.
Taxes are not that simple
The tax implications can be further complicated by the large fluctuations in value that characterize cryptocurrency investments. Also consider the cost: Suppose you pay someone as an independent contractor; to report that payment, you must give them an IRS Form 1099. Regardless of the type or amount of crypto currency you use, the IRS will tell you that you paid them the current market value of the crypto currency that day. If you pay an independent contractor and give him a 1099 form, you can’t put 1,000 bitcoins (BTC) on it. You must indicate the value in US dollars at the time of payment. The contractor you pay can keep the cryptocurrency, or sell or transfer it the same day, but this won’t affect your taxes. What about employee salaries? Wages paid to employees who use cryptocurrencies are taxable and must be reported on Form W-2. Taxes and social contributions are also withheld from it. Related: Taxation of crypto-currencies, returns and tax audits in 2021. But if you are paying someone with assets, how do you withhold taxes? You can pay part in cash and part in bitcoins and deduct part of the cash, but it can be complicated and confusing. Of course, you can also choose to pay like a contractor. But remember that questions of employee status can arise in any context, including this one. So investing and trading in cryptocurrencies inevitably comes with significant tax issues, whether you like it or not. It’s no secret that the IRS wants you to report your cryptocurrency income. You can also report losses on cryptocurrencies, but the IRS doesn’t care that much if you report them. Income and profits, on the other hand, are important to the tax authorities. The IRS continues to believe that there are serious compliance issues in the cryptocurrency community, so there is still a lack of trust and increased vigilance. Related: More calls from IRS for holders of crypto currency accounts
The latest evidence that this problem remains is that the U.S. Treasury Department plans to issue new rules requiring companies that receive cryptocurrencies worth more than $10,000 to file a report with the government about the currency transactions, including names and details. You may think you won’t get caught, but the risks increase. The best way to avoid fines or worse is to disclose and report as accurately as possible. Remember the 10,000 letters the IRS sent to crypto taxpayers? What about all those IRS subpoenas against Coinbase, Kraken and others? The hunt continues, as evidenced by the issuance of the crypto currency tax on IRS Form 1040. The Justice Department’s tax department has successfully argued that simply not checking a box to report foreign bank accounts is in itself intentional; the same argument can be applied to cryptocurrency accounts. Related: Crypto FBAR: Effects outside Intentional violations result in higher fines and an increased risk of criminal investigation. The IRS Criminal Investigation Division has met with tax authorities in other countries to share data and enforcement strategies on tax evasion through cryptocurrencies. When you file your tax return, the IRS asks you a simple question: Have you received, sold, shipped, exchanged or otherwise acquired a financial interest in any virtual currency at any time during 2020? It seems simple enough. Yes or no? What could go wrong? You won’t be asked for numbers or details – although if you’ve sold an amount, it should be reported on your tax return. After all, since cryptocurrencies are owned by the tax authorities, every sale will result in a profit or a loss. This applies to many other transfers, even exchanging one type of crypto currency for another. The latest move was the announcement that the Treasury Department plans to introduce new reporting requirements for cryptocurrencies. Banks and financial institutions will soon be required to provide information to the IRS. Exchanges, custodians and payment services for cryptocurrencies must do the same. Oddly, the government is borrowing pages from the cash transaction rules, even though the IRS declared back in 2014 that cryptocurrencies are property, not currency. In the case of cash payments, reports are filed on IRS Form 8300 for payments over $10,000. The IRS even offers a list of frequently asked questions about reporting cash. For years, businesses were required to report cash payments over $10,000, which led to people taking all sorts of (usually irrational) steps to avoid them. What is called structuring a transaction can be a crime, even if the money you are trying to use is all yours. So if the $10,000 basis for reporting cryptocurrencies is implemented, I imagine there will be people who try to keep something secret and get in trouble for trying to circumvent the reporting threshold. Under the Bank Secrecy Act, financial institutions are required to report foreign exchange transactions in excess of $10,000 to the IRS. The law also makes it a criminal offence to structure foreign currency transactions in such a way as to avoid reporting. The IRS Criminal Investigation Division enforces the cash transaction rules. However, the 2017 report states that the law primarily targets individuals and entities whose income was obtained legally. That’s exactly what happened to former House Speaker Dennis Hastert, who was indicted for structuring his own money. He was eventually sentenced to 15 months in prison. Could the implementation of the crypto currency law end up the same way? If the new $10,000 threshold for reporting cryptocurrencies is on par with reporting cash, some people may try to structure their coverage around it. If this is the case and the rules are similar to those for reporting cash, this can be very dangerous. This article is intended to provide general advice and is not, and should not be construed as, legal advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph. Robert W. Wood is a tax attorney and represents clients worldwide from Wood LLP’s San Francisco office, where he is managing partner. He is the author of numerous books on taxes and writes regularly on taxes for Forbes, Tax Notes and other publications.The IRS has released a report touting their success with crypto tax reporting. In reality, it’s only the most recent example of how the IRS uses the very concept of taxation to intimidate and bully anyone who dares to use cryptocurrency.. Read more about irs cryptocurrency capital gains and let us know what you think.