Although the addition of a question directly asking taxpayers whether they had dealt in cryptocurrency during the tax year has been discussed for several years, it appears that it will become a mainstay on the front page of Form 1040 for tax years starting in 2020. This is not the first year that the IRS has asked taxpayers whether they have engaged in virtual currency transactions. As a part of the 2019 Form 1040, a similar question made its way onto the Form 1040’s Schedule 1. Shifting the question concerning virtual currency to the first page signals that the IRS is stepping up its compliance enforcement around the disposition of cryptocurrencies such as bitcoin and Ethereum. If you have traded in cryptocurrency but have failed to report disposition gains to the IRS and included such an amount into your gross income, you should contact an experienced virtual currency tax attorney to determine the best way to come into compliance.
The IRS recently posted a preview of the Form 1040 for the 2020 tax year on its website. The proposed virtual currency question is the first substantive tax inquiry that the form makes, immediately following the taxpayer’s identifying information. Specifically, the question asks whether the taxpayer has “At any time during 2020” “receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”.
This inquiry is intentionally broad. The Service has attempted to capture any type of transaction dealing with virtual currency. It is important to note that not all the events listed in the virtual currency return question above are taxable events. In Notice 2014-21, the IRS took the position that general tax principles concerning the taxation of property transactions are applicable to the acquisition of virtual currency because virtual currency is not “currency” for the purposes of the Internal Revenue Code, but rather should be treated as property. Thus, the acquisition of virtual currency would not give rise to a taxable event, as the acquisition of property would not. Nonetheless, the IRS would like to know whether taxpayers acquired virtual currency at any point throughout the tax year.
Nonetheless, taxpayers are required to pay tax on gains resulting from the sale or other disposition of virtual currency. The IRS has attempted, through many means including John Doe summons, to obtain records of virtual currency transactions. Unlike earning income from an employer or receiving payment as a service provider, there is no documentation sent to the IRS like a W-2 or Form 1099 that the Service can use to cross-check filed tax returns.
As we mentioned earlier, the shifting of the cryptocurrency question from Schedule 1 to the front page of the tax return is more symbolic than anything else. The IRS is telling the American people that they will be working hard to enforce the tax laws, especially when it comes to cryptocurrency transactions.
If you have transacted in cryptocurrency and have sold or exchange your interest in such currency for a gain but have failed to report such gain on your federal or state tax return, it is in your best interest to contact an experienced tax attorney who has an appreciation for the complex nature of virtual currency. Working together, you and your tax lawyer will determine the best path forward in maintaining compliance with federal tax laws and rectifying any unreported transactions or unpaid tax related to virtual currency transactions.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported taxable cryptocurrency gains coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
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