Cryptocurrency owners beware: A surprising change in your 2020 tax form is about to remove the excuses for ignoring tax rules on bitcoin, ether, or other digital currencies.
The Internal Revenue Service plans to modify the standard Form 1040 by putting this question on the front page: At any time in 2020, have you sold, received, sent, traded or otherwise acquired a financial interest in a virtual currency? The taxpayer must check the box “Yes” or “No”
The crypto question first appeared on the 2019 tax form, but on a part of the return that not all tax filers had to answer. Now it moves to the most important place in 1040, just below the taxpayer’s name and address.
The IRS ruling is a strong warning to millions of non-compliant cryptocurrency holders that they must file the required forms which they may consider a burden and pay taxes that ‘they may judge unfair. He impressed tax professionals.
“This placement is unprecedented and will make it easier for the IRS to win lawsuits against taxpayers who check ‘No’ when they should check ‘Yes’,” says Ed Zollars, CPA at Kaplan Financial Education who informs tax professionals legal developments.
Mr. Zollars notes that the US tax authorities have already succeeded with a similar strategy: a simple question of reporting income on offshore financial accounts has greatly facilitated their crackdown on Americans hiding money abroad. Since 2009, it has brought in over $ 12 billion from individuals.
By changing the position of the crypto question and asking all 1,040 depositors to answer it, the IRS makes it much harder to claim ignorance of the rules. Lying on a tax return is a bad idea because filers sign the returns under penalty of perjury, and juries often side with the IRS when it’s clear a taxpayer has lied.
The change in the crypto question and other recent actions show that the IRS takes cryptocurrencies seriously as a threat to the tax system, whether the non-compliance is due to enthusiasts who owe little or to international criminals. sophisticated. In two recent non-tax criminal cases – one involving a theft by North Korea and the other involving the sale of child pornography by a Dutch national – the IRS has provided key assistance due to its growing expertise in crypto-currencies.
The agency is right to worry about non-compliance, experts say. Coinbase, a major cryptocurrency exchange and custodian, said it had 35 million accounts in total as of July. Chainalysis, a company that provides crypto survey software, estimates that there were at least 3.1 million active accounts using the popular Bitcoin currency in the United States between June 2019 and July 2020.
The IRS won’t say how many taxpayers have checked the encryption box for 2019. But Dan Hannum, COO of ZenLedger, a crypto tax preparation software company, believes a total of less than 150,000 owners crypto have filed the required tax forms for 2017, 2018, and 2019, based on their knowledge of the industry.
For their part, many crypto users are angry with the advice of the IRS, which treats bitcoin, ether and their loved ones as property rather than currency. So if a crypto holder is using it to buy something or exchange one cryptocurrency for another, there is usually a capital gain or loss to report on the tax return.
“Buying a sandwich with cryptocurrency shouldn’t be a taxable event,” says Sean Cover, a New York cryptocurrency holder who works in finance for a nonprofit group. He says that in 2017 he made over 500 transactions across multiple platforms and took 10 hours to prepare his crypto tax forms even though he paid for special software.
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Like some members of Congress, Mr. Cover supports a threshold of $ 200 before crypto transactions need to be reported. IRS says it’s up to Congress to change the law.
Tax professionals also have concerns. Earlier this year, the American Institute of CPA sent IRS officials a 28-page letter challenging its guidelines that crypto received from reorganizations called forks and marketing giveaways called airdrops may be taxable for recipients. He also asked for other clarifications, such as reporting offshore holdings of cryptocurrencies.
Meanwhile, the IRS is moving ahead with other crypto compliance measures. Earlier this month, it offered rewards of up to $ 625,000 to code breakers who can crack so-called privacy coins like Monero that attract illegal activity because they claim to be untraceable.
At the end of August, the agency released guidelines claiming that taxpayers who receive cryptocurrencies for performing “microtasks” must report it as income. This applies to users of companies like StormX, which makes tiny crypto payments to people who perform small tasks such as playing games, taking surveys, or rating products.
The IRS is also sending out a new round of letters to cryptocurrency holders who may not have complied with tax rules, expanding the sending of around 10,000 letters last year. Tax experts say the recipients are often customers of Coinbase, which has been ordered by a federal court to pass information about certain accounts to the IRS.
Chandan Lodha, COO of Cointracker, a software company selling crypto tax preparation services, says many of his new clients are looking for help not just with the 2019 forms (due Oct. 15 for taxpayers with extensions) but also for previous years — presumably to modify previous declarations.
He adds: “From what we see, people are starting to get scared.”
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