It is no secret that the IRS has their sights set on cryptocurrency compliance and have for a few years. Newly discovered documents are giving taxpayers a glimpse into the measures that the IRS is taking to ensure that Americans are appropriately reporting and paying tax on their cryptocurrency transactions. For those taxpayers who have bought or sold cryptocurrency but have failed to report and pay tax on income from such transactions, there is still time to come into compliance by consulting with a tax attorney with experience assisting those involved in cryptocurrency trading.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including domestic or offshore non-reported cryptocurrency transactions) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before 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 voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs 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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The IRS Statement of Work
According to multiple press outlets, the IRS has created a Statement of Work for technology companies who may be able to reconcile taxpayers’ cryptocurrency gains and losses. Furthermore, the IRS is seeking the companies to create a detailed report for each taxpayer that is being analyzed. The Statement of Work acknowledges that transactions can range from small to very large.
Specifically, the Statement of Work requests that technology companies use data points that are made up of information received from digital exchanges, cryptocurrency wallets, API keys, and blockchain data, among other sources. The requested technology solution would then compare the information obtained independently with the transaction information reported by the taxpayer on their tax return. A detailed report would indicate if there is a meaningful difference and whether the taxpayer should be further investigated.
How the IRS Treats Cryptocurrency
Cryptocurrency, like Bitcoin, is considered property for U.S. tax purposes. Pursuant to IRS Notice 2014-21, virtual currency is not actual currency. Property, unlike currency, has a basis that is determined based on the purchase price. If a trader of cryptocurrency sells virtual currency for more than his or her basis in the asset, gain is recognized, and tax will generally be due. Currency, on the other hand, generally has a basis equal to fair market value and thus cannot trigger gain or loss upon its disposition.
In addition to paying tax on virtual currency gains, the IRS has begun requiring taxpayers to disclose whether they have dealt in virtual currency. Beginning with the 2019 Form 1040 Schedule 1, taxpayers are required to answer “Yes” or “No” as to whether they have, during the 2019 tax year, receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency. If a technology company can use its complex software solutions to determine that a taxpayer indeed has traded virtual currency, the IRS will have all the more reason to conduct an examination.
Coming into Compliance
While the IRS has made it known that it intends to crack down on undisclosed cryptocurrency transactions, there is still time to come forward and get right with your tax compliance if you have failed to report gain from the sale of virtual currency. Working with a tax attorney who has experience in assisting virtual currency traders, you can develop a plan to come into compliance. Your tax attorney will assist completing any documentation required and will represent you before any interactions with the IRS.
During this unprecedented COVID-19 pandemic, the IRS and Department of Justice have scaled back new audits, investigations, and prosecutions. Nonetheless, when society begins to normalize, it is expected that tax compliance and enforcement actions will skyrocket. Taxpayers who have found themselves out of compliance with the tax laws have a golden opportunity to come into compliance while the offense is on the bench.
We Are Here for You
Regardless of your business or individual tax needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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More Questions and Answers About Bitcoin
- What to Do When IRS Wants My Bitcoin Trade History
- Bitcoin Tax Record Keeping
- Can I Appeal a Bitcoin Tax Determination by the IRS?
- Why does BitCoin and other types of Virtual Currency draw so much attention from the Taxing Authorities and the Federal Government?
- Where is the most current IRS guidance on Virtual Currency found?
- Should You Report Bitcoin on Your Taxes?
- What Is Bitcoin?
- How does the IRS treat Bitcoin?
- Can I Face Tax Penalties for Mistakes Made with Bitcoin?
- How Does a Business Determine Its Taxes When Paid in Bitcoin?
- Who Pays the Taxes in a Bitcoin “Mining Pool?”
- Are Bitcoin Miners Required to Pay Self-Employment Tax?
- Can Bitcoin Trading Create an Obligation to Pay Capital Gains Taxes?
- What Is Bitcoin Digital Currency and Why Does it Matter for Tax Purposes?
- What Happens if the IRS Thinks I’m Using Bitcoin to Commit Tax Evasion?
