IRS Launches Crackdown To Ensure Crypto Investors Pay Their Taxes

Admissions from the IRS in court filings suggest this tactic has been working for the agency. In one filing to justify its summonses, the the agency said it had received more than 1,000 amended tax returns and collected $13 million from crypto holders with more than $20,000 of transactions, plus another $12 million from other crypto notices, and audits are ongoing.

Remember, those who are caught skirting taxes often are forced to enter the IRS's Voluntary Disclosure program for taxpayers with criminal liability, a program that usually lets participants out of prosecution but imposes large penalties.

Another filing hinted at a different strategy being employed by the agency: the agency plans to compare data it receives from Kraken to data on offshore crypto transactions. It didn’t identify the source of this offshore data to look for discrepancies. Kraken may also soon need to turn over phone numbers, email addresses, DoBs, tax ID numbers and other sensitive details as part of the subpoena.

With all this in mind, here's a few quick reminders from WSJ:

When it comes to crypto tax laws, here are the basics: In 2014, the IRS declared that cryptocurrencies are property, not currencies like the dollar, and therefore are treated like an investment property akin to stocks. If an investor sells crypto after holding it for longer than a year, the profit is a typically considered a long-term capital gain, and taxed at lower rates than ordinary income under current law (although Congress may soon change this for the highest earners).

If the holding period is a year or less, the profit is a taxed as a short-term capital gain as the same rate as ordinary income like wages. Capital losses on crypto investments can offset taxable capital gains on other assets as well as crypto, plus up to $3,000 of ordinary income such as wages a year—a valuable benefit. Unused losses can be carried forward to future years.

Tax triggers

Any time a cryptocurrency is bought or sold or spent is a taxable transaction. If you trade bitcoin for dogecoin, that transaction has tax exposure.

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William K. 2 months ago Member's comment

I did not realize that bitcoins were property and not currency. Interesting indeed. Perhaps this fad WILL pas. I hope.

Anne Davis 2 months ago Member's comment

I don't have a problem with this. If you make money of it, why not pay taxes on the profit?