We know that the Internal Revenue Service (IRS) has been investigating tax evasion and other crimes tied to cryptocurrency. The agency has been hard at work for some time in scrutinizing crypto and for the past two years, it has been in the process of developing and executing investigation techniques to enforce cryptocurrency compliance. Along with some other countries, the US has been involved in intensive data sharing. Calling themselves the “J5” comprised of the United States, United Kingdom, Canada, Australia and the Netherlands, the coalition has been able to combat transnational tax crime more intensely and efficiently through increased collaboration. More detail about this coalition can be found at my tax blog post here.
Cryptocurrency – Who wants a job with the IRS?
On May 12th 2020, the IRS sent out a Statement of Work (SOW) to private outside contractors seeking assistance in the audits of tax returns with cryptocurrency related transactions. The full SOW is reproduced on the blog of CryptoTrader.Tax, a cryptocurrency tax software company. The SOW can be accessed here and gives readers a glimpse of what will be down the road if they are audited with a cryptocurrency issue. The IRS is specifically seeking outside contractors to assist its own revenue agents in calculating taxpayers’ gains or losses as a result of their crypto transactions. It recognizes that specialized technology and infrastructure will be required to digest, contain and analyze voluminous amounts of data.
Cryptocurrency tax reporting is a highly complicated matter. The SOW indicates the IRS will be digging deeply into crypto transactions and envisions that its cases will involve some taxpayers having hundreds of thousands of digital asset transactions a year, across multiple exchanges and digital wallets that can be online, on a personal hardware device or even on paper. Is it any wonder the IRS is seeking help?
Caution – 2019 Tax Returns
Over the past year, the IRS has had a lot to say about tax reporting of cryptocurrency transactions. The 2019 tax return must be handled with care to make sure reporting is done properly. A review of the IRS guidance on crypto is at my earlier tax blog post here.
Don’t miss the new, probing question on Form 1040 Schedule 1 for 2019 tax returns. The very first question on Schedule 1 asks, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?” Taxpayers must check a “yes” or “no” box. Diligent tax return preparers should be asking clients about cryptocurrency and should have added this question to an updated tax organizer. If your return preparer has not done so, you should be questioning if you have the right preparer. It is suggested that in reporting crypto transactions very close adherence is paid to the information the IRS has been providing. A conservative approach may be best in reporting transactions involving crypto and ensuring there is adequate documentation to support positions taken, including how gains and losses were calculated.
I have written many blog posts on the US taxation issues involved with virtual currency. All of them can be found here. Overseas Americans with cryptocurrency accounts located in foreign jurisdictions must be particularly aware of the issues they face with respect to proper tax reporting.
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