The IRS is considering building cases against taxpayers who are not able to report cryptocurrency. Even if more tax rules awareness is presented nowadays, it is believed that millions of business transactions are unreported. The risk is getting higher for those taxpayers who think that their unreported business transactions will not be caught by the authorities. Disclosing and reporting accurately as you can is the best way to avoid penalties. Taxpayers may assume that they do not need to think about criminal exposure since IRS may just have them pay the penalty. What these taxpayers forgot is that violators can face a huge penalty or even undergo criminal investigation. Those who are convicted with a tax evasion case may be asked to pay the penalty of as high as $250,000 or stay in prison for 5 years.
Eric Hylton was recently asked to head the Internal Review Service Small Business/Self-Employed Division. He was from the IRS Criminal Investigation Division. Increasing the criminal investigation is moved by Commissioner Chuck Rettig. IRS was just starting in its investigation when it sent letters to 10,000 crypto taxpayers last year. Recipients who ignored the received letters might be vulnerable. When you receive the letter, you cannot use an innocent mistake as an alibi. A question that targets the cryptocurrency is contained in the drafted 2019 Form 1040 by the IRS. The taxpayer is required to answer the checkbox on Schedule 1. This part is where the taxpayer is asked whether they have sent, exchanged, sold, or else got any cryptocurrency financial interest at any time during 2019.
That is telling you something. After all, it has been successfully argued by the Department of Justice Tax Division that in the FBAR reporting context, forgetting to check a box is per-se willfulness. This carries a higher penalty and a big possibility for a criminal investigation. IRS and the Department of Justice Tax Division are working together and already engaged in some criminal prosecutions that involved cryptocurrency. It clearly shows that other cases are starting to come in. The Criminal Investigation Division of the IRS had a discussion with other countries to share strategies and data in finding a potential cryptocurrency tax evasion.
It is stated in IRS Notice 2014-21 that cryptocurrency exists as a property and is taxable. This means that if you get again you pay for taxes and when you trigger a loss, you have the option to claim losses. Knowing the details on how much you paid for the cryptocurrency when you bought it, and what you are receiving for it is a must. This may appear simple for stock and real estate but it is much more difficult for cryptocurrency. In the Frequently Asked Questions of IRS, it is stated that you must report all gain, income or loss that involves virtual currency whether or not you received a Form W-2 or Form 1099. Most of the investors in cryptocurrency have made multiple purchases for many years. The IRS discloses that the basis is decided by the virtual currency’s fair market value, in U.S. dollars, when it is received. The value of the virtual currency is easily determined when it is received from an established exchange.
It can be considered as dirtier if the virtual currency of the taxpayer is received through a peer-to-peer transaction or if it does not have a published value. It is still required by the IRS for the taxpayers to use a reasonable method in giving value to the cryptocurrency and to justify that the given value is accurate. You may use the information that you may find online to help you in how to figure out a taxpayer’s transaction history. There are information that will try to estimate the amounts owed and the Schedule D form filled out reporting the gains and losses. These software programs may have their flaws too and the IRS may still treat this as a violation. But, there is one case (which does not involve cryptocurrency) reported that provides support to relieve from penalties if the software used is the one to be blamed for the mistake.
Investors may have other issues with mining cryptocurrency. One of these is the trouble interpreting the exact time when they received for the purpose of determining the value of the mined cryptocurrency for reporting purposes. According to the IRS, in determining the market value used to conclude whether there is gain or loss, a reasonable method must be used by the taxpayers. First-in-first-out (FIFO) of other methods can be used as long as it is consistently applied by the taxpayer. If there is no detailed log in the past that has been recorded by the taxpayer, then there is a need to use other methods for past transactions.
Even though there is guidance from the IRS, there are still significant concerns. The Frequently Asked Questions and the guidance of the IRS do not specifically address how the value is computed, how the basis is being determined, or how to apply the estate tax rules to cryptocurrency. Moreover, the FAQs of the IRS are technically not a legal authority. Even if there is an increase in FAQs, the Revenue Ruling 2019-24 is not included in the new guidance. The said revenue ruling only addresses the usual questions on the cryptocurrency. A quiet disclosure or a normal amended return may be fine in some cases even if you are not IRS compliant. There are also cases where it may be appropriate to formally and voluntarily disclose to the IRS. It is in no mistake that the IRS intends to make big enforcement and revenue drives and there may be public, big and messy examples of the enforcement efforts of the IRS.
Daniel P Vigilante CPA and Profit Consultants