As Cryptocurrency Gathers Steam, The IRS Moves To Tackle Virtual Currency Tax Evasion
Earlier this week, Eth logged its first loss after trading at $3,779.81 for the first time. Investors of the second-largest cryptocurrency will be celebrating as they enjoy increasing gains - just like cryptocurrency investors across the globe. Recently, CNBC’s Jim Cramer shared that he had repaid his mortgage using Bitcoin profits. The rising popularity of cryptocurrency investment has prompted the IRS to accelerate its plans for taxing cryptocurrency. According to the IRS Commissioner, Charles Rettig, the U.S. fails to collect over $1 trillion in taxes owed every year, partly due to the surge in cryptocurrency. This year, the IRS is stepping up its efforts to find crypto tax evaders and to educate cryptocurrency investors on the taxation rules on their investment.
The IRS Adds A Key Cryptocurrency Change To Form 1040 For The 2020 Tax Year
Since 2014, the IRS has considered cryptocurrency as investment property. This has substantially influenced the levying of IRS charges on virtual currencies. From a tax point of view, cryptocurrency investors are liable for capital gains tax on their gains and transactions. Taxpayers will either pay long or short-term capital gains tax, depending on the length of holding. Consumers who hold cryptocurrency for 12 months or less are required to pay a standard income tax according to their income bracket. If you have held the cryptocurrency for more than 12 months, single taxpayers with an income of $40,400 or less will pay 0 percent capital gains tax. However, if your income exceeds $40,400, taxpayers are expected to pay 15 to 20 percent tax.
There is, however, no tax-free allowance for cryptocurrency, and the IRS is eager to reiterate that. All amounts of cryptocurrency traded or mined need to be declared on a taxpayer’s Form 1040. In 2019, the IRS introduced a question for taxpayers on their interest in virtual currency. Now for the 2020 and future tax filing seasons, the IRS has decided to make it a more prominent feature on Form 1040. The question, “At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?" is now found just after the taxpayer’s name and address.
Coinbase And Bitpay Partner With The IRS For Customer Data Sharing
In late 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice that it would move towards requiring taxpayers with cryptocurrency holdings of $10,000 or more offshore to report their holdings. FinCEN’s plans to include virtual currency in the Bank Secrecy Act are aimed at aligning reporting requirements with the current regulations in place for cash and foreign financial accounts. While there was no timeline given for the FBAR amendment, it is expected that it will be fast-tracked this year as tax authorities move to clamp down on virtual currency tax evasion and under-reporting.
IRS Moves To Issue ‘Joe Doe’ Summons To Cryptocurrency Exchange
Another way the IRS is stepping up its tax regulations for cryptocurrency holders is by introducing regulation that compels trading platforms to share customer information with them. In 2016, there was a court case between Coinbase and the IRS - which Coinbase ultimately lost - after the platform resisted an IRS-issued summons to share a list of customers who had bought Bitcoin between 2013 and 2015. The action has since results in over $25 million of revised taxpayer assessments. However, Coinbase is not the only cryptocurrency platform that has been the target of IRS investigations.
Earlier this month, a judge approved the IRS’s request to serve a ‘Joe Doe’ summon to Boston-based Circle Internet Financial. The summons is aimed at U.S.-based customers of Circle who engaged in cryptocurrency transactions of $20,000 or more between 2016 and 2020. The information requested will include account funding, activity records, and account registration records. Those users can now expect notifications from the IRS advising them to file an amended tax return and disclose their cryptocurrency activity or risk a penalty.
The IRS is also seeking entry into hardware wallets for cases of interest. With 14 percent of the U.S. population owning cryptocurrency, the federal authorities are recognizing the rising need to establish set regulations for its taxation. They believe that investors are capitalizing on the trading of cryptocurrency, thanks to its difficulty in tracing transactions, for tax evasion purposes. As the cryptocurrency industry gears up for more regulations, these are just the tip of the iceberg this tax season.