The IRS will be sending letters to certain individuals that they believe own crypto currency. However, we have already been approached since June by taxpayers that have received letters from the IRS assessing a balance of tax due along with under-reporting penalties.
A short history of how we got here:
Independent taxpayers quietly traded crypto for years either as amateurs and increasingly as a full time profession. In 2017, there was a boom of crypto activity and seemingly everyone in the US and around the world was buying various types of crypto currency. Meanwhile, out of the millions of persons that bought cryptocurrency, only several hundred actually reported it on their tax returns. The IRS quickly noticed this and as early as 2017 started to invest in software to track crypto wallets.
After continuing to receive insufficient volume of crypto returns, the IRS finally issued a subpoena to coinbase and have conducted other types of investigations to attempt to identify individuals that are involved with digital currency.
Next probable steps by the IRS:
- There is a presentation available by the IRS’s criminal enforcement division detailing crypto compliance strategy
- The IRS may be attempting to obtain download information from Google, Apple, and Microsoft
Possible reasons why insufficient crypto activity was self-reported by taxpayers:
- The type of individuals attracted to crypto believed in its secret nature
- There was a common misconception that these transactions should only be reported to the IRS if the money was “cashed out” to USD or another national currency, which is incorrect. Crypto to crypto should generally be reported. In 2017 & 2018, hundreds of misguided blog and forum discussions on this topic were circulating on the internet
- Many are under the false assumption that if you filed & did not receive a letter, you are safe. However, the IRS frequently takes 18 months or longer to assess a balance due or request further details. Additionally, the IRS is quickly researching other methods to track this activity
What you should do & further notes:
- If you had crypto sales in any given year (that includes crypto-to-crypto sales, such as trading Litecoin for Ripple), you should amend your return before you are flagged
- We are happy to support this – just request our assistance using the form below
- Proactively correcting your return will generally protect you from the “substantial understatement penalty” that is automatically assessed by the IRS when the IRS flags a return. It is not assessed if the taxpayer comes forward, in most cases