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Got Crypto? IRS Warns Cryptocurrency Owners About Possible Tax Violations

(Image credit: Marc Bruxxel / Shutterstock)

Updated, 8/19/19, 7:20am PT: CoinDesk reported that cryptocurrency traders have received letters from the IRS saying they misreported their revenues on previous tax filings. The agency seems to have shifted its tone from "you may have misreported your earnings," which encourages crypto owners to double-check their statements, to the definitive "you misreported your earnings." That means the agency is confident enough to tell people exactly how much they owe from previous tax years--and to charge interest on those unpaid taxes.

The notices are reportedly being sent via CP2000 letters that essentially say the figures reported by some citizens' financial institutions differ from what the citizens themselves reported on their taxes. People who receive such letters have 30 days to respond--even if only to say they can't afford to pay. (The IRS also works out payment plans with people who can't pay the lump sum.) These efforts drive home the fact that the IRS won't be content with cryptocurrency traders profiting off virtual currencies without giving the U.S. a cut.

Original article, 7/27/19, 11:48am PT:

Cryptocurrency traders might want to double-check their tax returns. The IRS said on Friday that it sent "educational letters" to more than 10,000 people who "potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly."

Some people are drawn to cryptocurrency because it's supposed to be anonymous. That's part of the reason why ransomware often demands payment in cryptocurrency--the transactions are harder to trace than a traditional money transfer would be. It's not impossible to figure out who was involved in a cryptocurrency transaction, though, and the IRS said it's become increasingly interested in making sure people accurately report their incomes.

"The IRS is expanding our efforts involving virtual currency, including increased use of data analytics," IRS Commissioner Chuck Rettig said on Friday. "We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations." Put another way: Uncle Sam's more interested than ever in making sure it gets its cut of cryptocurrency transactions. The days of being able to keep these payments hush-hush are numbered.

The U.S. isn't the only country subjecting cryptocurrency to greater scrutiny. India has considered a 10-year jail sentence for anyone caught mining, holding, buying, or selling any cryptocurrency, and China's also mulled regulations that would prevent its citizens from using cryptocurrency. Similar regulations are unlikely to appear in America, but the IRS has made it clear that it's not going to turn a blind eye to cryptocurrencies, either.

"Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest," the IRS said on Friday. "In some cases, taxpayers could be subject to criminal prosecution." More information about how the IRS handles cryptocurrency is available via the agency's website; the agency said it expects to issue "additional legal guidance in this area in the near future."

  • derekullo
    Monero/MTP/Ethereum mining ... never heard of it.
    I used all that electricity prototyping an emp ... for a school project.
    The BMW up front was from a series of below $1000 casino winnings.
    Reply
  • hotaru251
    TBH to get their point across 1st time is a warning.

    anything after that? fined ontop of having to pay the value (at the time of taxes) of crypto they hid. (basically they lose most/all of the crypto's value on top of the fine for hiding it)
    Reply
  • bit_user
    I didn't even start trading until the IRS released reporting rules. Once they did that, I took it as a sign that it was kosher and opted for an exchange that was in full compliance with my state's regulations.

    So, yeah, of course I reported it!
    Reply
  • perfectdarksky
    It's not difficult to know who had been trading in cryptocurrencies but it difficult to know the amount traded and to whom and what was it exchanged for. And how are they supposed to tax an extremely volatile currency? today (ex: before the tax filing) 1 bitcoin might be 20Grand USD but tomorrow (ex: the day after submitting the tax form) it may be 5Grand, so how much should they pay for tax? What the IRS is doing now is just fearmongering.
    Reply
  • Gam3r01
    perfectdarksky said:
    It's not difficult to know who had been trading in cryptocurrencies but it difficult to know the amount traded and to whom and what was it exchanged for. And how are they supposed to tax an extremely volatile currency? today (ex: before the tax filing) 1 bitcoin might be 20Grand USD but tomorrow (ex: the day after submitting the tax form) it may be 5Grand, so how much should they pay for tax? What the IRS is doing now is just fearmongering.
    One would have to assume you get taxed on the value of the transaction.
    Dosent matter if I buy a 2000 dollar TV and it goes on sale for 500 bucks next week, I paid tax on 2000.
    Reply
  • AllanGH
    perfectdarksky said:
    And how are they supposed to tax an extremely volatile currency?
    You pay tax on the amount you receive AFTER the crypto is converted to US dollars (less your original US dollar crypto investment), because at that point, it's income.
    Reply
  • bit_user
    perfectdarksky said:
    It's not difficult to know who had been trading in cryptocurrencies but it difficult to know the amount traded and to whom and what was it exchanged for.
    Well, places you buy and sell crypto-currencies are subject to financial reporting regulations. So, the IRS can find out how many you bought and sold, how many you transferred, and how much you hold. Then, if you get audited, you have to show the IRS that the taxes you paid can account for all of that.

    perfectdarksky said:
    And how are they supposed to tax an extremely volatile currency?
    If you read the IRS reporting rules, they're taxed just like any other asset, such as stocks, bonds, precious metals, etc. What you pay taxes on is the change in value between when you bought and sold. You should likewise be able to write down losses, if you sold for less than you bought at. If you make a financial transaction other than for $USD, I guess the spot price is taken as the value, for tax purposes.

    perfectdarksky said:
    today (ex: before the tax filing) 1 bitcoin might be 20Grand USD but tomorrow (ex: the day after submitting the tax form) it may be 5Grand, so how much should they pay for tax?
    You're not taxed on holdings. Only sales (which includes exchanging crypto currency for goods or services).

    perfectdarksky said:
    What the IRS is doing now is just fearmongering.
    You really want to call their bluff? If you get audited, you're screwed. Before you decide to fight it, maybe ask Wesley Snipe how that worked out for him.

    https://en.wikipedia.org/wiki/Wesley_Snipes#Income_tax_conviction
    Maybe you can fight the IRS if you're a billionaire. But, if you're a mere mortal, the IRS pretty much always wins.
    Reply
  • bit_user
    Gam3r01 said:
    One would have to assume you get taxed on the value of the transaction.
    Dosent matter if I buy a 2000 dollar TV and it goes on sale for 500 bucks next week, I paid tax on 2000.
    Well, if we separate the issue of sales tax (charged by the merchant) and your trading of the asset (i.e. crypto coin) for the TV, which (for tax purposes) counts as a sale, then yes. If you spend $2000 worth of crypto coin on the TV, then you take the spot price for that amount of currency that you exchanged and you incur a tax liability on it.

    AllanGH said:
    You pay tax on the amount you receive AFTER the crypto is converted to US dollars (less your original US dollar crypto investment), because at that point, it's income.
    Well, if you're talking about investing in crypto, it's not taxed as income, but rather a capital gain (or loss).

    This stuff is really no more complicated than other financial assets. The only thing harder about crypto is the volumes are potentially much greater. There are tools to help with that, but I had few enough trades that I could compute my tax liability with a spreadsheet.
    Reply
  • AllanGH
    bit_user said:
    Well, if you're talking about investing in crypto, it's not taxed as income, but rather a capital gain (or loss).
    IF that crypto asset has actually been held for more than one year before divestiture (long-term capital gains). For assets held for under one year, it's short-term capital gain and is taxed as normal income.
    Reply
  • thegriff
    derekullo said:
    Monero/MTP/Ethereum mining ... never heard of it.
    I used all that electricity prototyping an emp ... for a school project.
    The BMW up front was from a series of below $1000 casino winnings.
    If you are in the US, try that with the IRS. They aren't as stupid as you think, they will work to trace everything. So, if you can't show where your income came from you are going to pay. Also, below $1000 winnings are taxable, only the casino doesn't have to report it, but again you would have to explain how you bought the BMW.
    Reply