The United States Internal Revenue Service (IRS) has stepped up and introduced new avenues to expand on its enforcement capabilities. They have set up a new program specifically dedicated to tax compliance in terms of cryptocurrency.
The IRS introduced “Operation Hidden Treasure.” Then begun to employ resources that will tackle unreported income gained from crypto transactions. The Director of the Office of Fraud Enforcement, Damon Rowe, has gathered a team of IRS Criminal Investigation experts. They will examine the blockchains to highlight tax evasions among cryptocurrency users.
Timeline of Increasing Focus on Cryptocurrency Tax
“Operation Hidden Treasure” allows IRS to look into cryptocurrency tax. But this isn’t the first time the agency has addressed the issue. Since 2014, IRS has been putting in the effort to increase transparency among crypto users. Let’s have a look at the timeline:
2014 – IRS “Notice 2014-21” mentions that virtual currency is the property for federal tax purposes.
2015 – IRS began using blockchain analysis tools in investigations.
2016 – IRS issued “John Doe” summons to Coinbase for 500,000 customer records.
2017 – Courts ruled in favor of IRS and issued a court order to Coinbase to provide their records.
2018 – IRS launched a Compliance Campaign which focused on cryptocurrency tax reporting.
2019 – IRS sent out the first round of notices to crypto taxpayers and added a “Virtual Currency Question” to 1040, Schedule 1.
2020 – 1040 included additional “Virtual Currency Questions” and IRS sent out the second round of notices to crypto taxpayers.
2021 – The introduction of “Operation Hidden Treasure.”
What is “Operation Hidden Treasure”?
From the information we know, “Operation Hidden Treasure” comprises a team of trained agents. They are well-versed in cryptocurrency and the tracking of this virtual currency. They put their focus on taxpayers who fail to mention their cryptocurrency income in their tax returns. This operation is the combined effort of civil fraud enforcement and the criminal investigation unit. Created to extract information regarding tax evasion from crypto holders.
Carolyn Schenck, from the national fraud counsel in the IRS Office of Chief Counsel, explained how the agency is working alongside private vendors and contractors. Such as Blockchain Analytics firms, to come up with “signatures” which will signal fraudulent activities. Such indicators will look into transactions that are below reporting requirements, i.e., sending a series of $10,000 transactions. The IRS is collaborating with professional consultants to investigate tax evasion signatures.
Cryptocurrency gained popularity because the users and cryptocurrency holders could remain anonymous through blockchain technology. Officials of the IRS explained they are “analyzing blockchain and de-anonymizing [crypto] transactions… to be able to track, find, and work to seize crypto in both a civil and criminal setting.”
Considerations for Crypto-Users before Filing Their Taxes
It’s not a new phenomenon for crypto-users to underreport their income. To this very day, there are numerous taxpayers who don’t fully understand the consequences of not filling their crypto income. There are many who still believe that the IRS can’t track their activity and transactions.
To this point, Carolyn Schenck explained that “these transactions are not anonymous, we see you.” There are plenty of firms and Certified Public Accountants (CPAs) who are hesitant to adopt cryptocurrency tax returns. An estimated 18 to 21 million US taxpayers will have to consider their crypto income when filing for taxes.
Since 2019, through the introduction of “Virtual Currency Question” to 1040, Schedule 1, taxpayers don’t have an excuse to be ignorant of their tax obligations. It’s up to accounting experts and professionals to guide and assist crypto-users on how to properly file their crypto income.
Compliance Obligation Explained
The first step for CPAs is to understand the compliance obligations when it comes to cryptocurrency. The IRS has provided a framework for taxable transactions, and the capital gains and losses are the primary concern of crypto clients to determine their compliance impact.
CPAs and crypto-users understand that transactions such as selling cryptocurrency for US dollars (or any other currency for that matter) are taxable. However, there are several other instances where crypto transactions are eligible for reporting:
- A transaction where you exchange the cryptocurrency for something of value. This could be anything from purchasing something online or in-person to exchanging your crypto coins for another currency. In these instances, the transaction is taxable.
- If there are fees incurred during crypto transactions and you pay it through cryptocurrency only, this creates a taxable transaction.
- In the event that you earn an income from crypto, all payments made by crypto for goods and services are considered income for the recipient. Income generated through staking, mining, and other decentralized Finance activities is eligible for reporting.
IRS Priorities for Virtual Currency
IRS has repeatedly stated the need for understanding the obligations around virtual currency. They have taken steps to make sure that the enforcement of tax laws is fair for the people who refuse to follow the rules involving cryptocurrency.
The cryptocurrency reporting compliance enforcement has witnessed an increase by the IRS, and it has become mandatory for crypto account holders to start paying attention to their compliance obligations. If they are unable to do so, it’s advised that they seek help and guidance from trained professionals and qualified tax advisors.