With the rise of cryptocurrency, the IRS and US government have been faced with questions surrounding how to define, regulate and report this new form of currency. Federal banking regulators question whether cryptocurrency firms are in the business of banking, and according to the SEC, some, but not all, cryptocurrencies are considered to be securities.
The IRS classifies virtual currency as “a digital representation of value that functions as a unit of account, a store of value, and a medium of exchange”. In a recent notice, the IRS clarified that virtual currency is viewed as property, and have stated that starting in 2023, crypto transfers valued at $10,000 or more will need to be reported to the IRS.
For the millions of taxpayers who will need to consider including cryptocurrency transactions in their 2021 income reporting, staying abreast of these changing requirements will be critical.
The IRS has stated that it has already identified dozens of potential tax evaders leveraging cryptocurrency, and has even established a special enforcement unit known as “Operation Hidden Treasure” to find and trace cryptocurrency tax evasion cases. Specifically, the IRS has stated that it fears that wealthy Americans may shift taxable assets into the crypto economy in an attempt to reduce their tax liability. However, taxpayers can face up to 75% in civil penalties for fraudulent tax avoidance related to cryptocurrency, which includes failing to truthfully disclose crypto assets on a tax return.
All indications point to a Federal crackdown on cryptocurrency tax avoidance. If you have questions about how to disclose cryptocurrency assets on your 2021 tax filings, leave a comment below, or feel free to contact me directly. I’m happy to help!