Text: Robert W. Wood
Source: Cointelegraph Chinese
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Editor's note: The original title was "Cryptocurrency Failure to Report Taxes May Pay Expensive and Even Criminal Penalties"
The Internal Revenue Service has realized that millions of cryptocurrency transactions may still not be taxed. Taxpayers may feel that they will not be arrested, and many Coinbase users may think their information will be protected until John Doe receives a subpoena, proving that this is not the case. And the best way to avoid penalties is to disclose and report transaction information as accurately as possible, stating that you have no intentional tax avoidance at all.
Otherwise, you could face heavy penalties and even criminal investigations. For example, anyone convicted of tax evasion could face up to five years in prison and a fine of up to $ 250,000. Taxpayers may think the IRS will punish them, but they may think that they don't need to worry about any criminal consequences.
IRS recent actions
However, taxpayers should consider the IRS's recent actions in referring criminal cases. IRS Director Charles Rettig's actions herald a possible increase in the number of criminal investigations. Recently, Eric Hylton of the IRS's Criminal Investigation Department was asked to head the IRS 'Small Business / Self-Employed Division. Commissioner Rettig mentioned the percentage of referrals to civil cases that are currently not included in the criminal investigation checklist.
The IRS is apparently also taking steps to sue taxpayers who have not reported cryptocurrency transactions . If the above-mentioned IRS soft letter is received but not processed, it will not be regarded as an unconscious mistake or misunderstanding, but the soft letter will also be evidence of intentional hidden assets. The IRS recently released a draft 2019 tax form for 1040 that includes a question for cryptocurrencies. The option box on Schedule 1 asks taxpayers to answer whether they have sold, sent, exchanged or otherwise obtained any economic benefits related to cryptocurrencies at any time in 2019.
The absence of tax filings has also led to controversy in the Department of Taxation of the Ministry of Justice, who concluded that in the case of reporting foreign bank accounts, the act of not ticking the option is deliberate. In contrast to unintentional conduct, deliberate failure to report is threatened by heavier penalties and greater criminal investigations. The Department of Justice's Tax Division is working with the Internal Revenue Service to participate in several criminal lawsuits involving cryptocurrencies and warns that other lawsuits are also coming. The Internal Revenue Service's Criminal Investigation Department will also hold meetings with tax authorities in other countries to share data and enforcement strategies to uncover potential cryptocurrency tax evasion.
How to treat cryptocurrencies
The IRS's 2014 guidelines (Announcement 2014-21) state that cryptocurrencies are not currency for tax purposes, but rather a property. Since cryptocurrencies are considered property (like stocks or real estate), taxpayers are taxable once they have gained the income, but they can also claim compensation when they realize the loss. As property, taxpayers must know when they bought cryptocurrencies, how much they spent, and what they got.
For stocks and real estate, the above questions may be simple. But it can be much more difficult for cryptocurrencies. The IRS's FAQ states that regardless of the amount of money, or whether a W-2 or 1099 form is received, all income, gains or losses involving virtual currencies must be reported. And many cryptocurrency investors have purchased virtual currency multiple times and for many years.
The IRS guidelines state that when a virtual currency is received, the basis of judgment is determined by the fair market value of the virtual currency denominated in US dollars. If the virtual currency is received from an established exchange, the market value will be easier to confirm. However, if the taxpayer receives virtual currency through peer-to-peer transactions, or if the cryptocurrency itself has no public value, the situation is much more complicated. The IRS still requires taxpayers to use some reasonable method to value cryptocurrencies and confirm that the value is accurate.
What taxpayers should do with cryptocurrencies
There are many websites available to help taxpayers understand the transaction history. Some of these sites will even try to estimate the amount of taxes owed and complete the form in Schedule D to report gains and losses. These software programs may not be perfect, and the IRS may not forgive them for their mistakes. However, at least one reported case (not involving cryptocurrencies) has proved that reporting errors caused by the software used can reduce penalties.
Those mining cryptocurrency investors may also face other problems. On the one hand, they may have difficulty explaining exactly when they got their cryptocurrencies, which makes it difficult to determine their value for reporting. IRS guidelines state that taxpayers must use a reasonable method to determine the fair market value of profit or loss.
As long as this method is always applicable, taxpayers can use the "first in, first out" method or some other method. If the taxpayer has not kept detailed logs in the past, past transactions will require other methods. Ideally, it would support an argument about (taxpayers) doing their best to comply with (IRS laws and regulations) in the past, as well as supporting future consistent reporting.
As cryptocurrencies become more common in the market, they can already be used to purchase goods or services. However, since it is considered a property, every transaction brings gains or losses. Taxpayers who use cryptocurrencies for small purchases may have a large number of reported gains and losses that must be recorded, reported, and calculated within one year.
Other uncertainties in cryptocurrency reports
Of course, more generally, even with the latest IRS guidelines, there are still major issues. The latest guides and FAQs don't specifically address how to calculate value, how to determine calculation benchmarks or how inheritance tax rules apply to cryptocurrencies. Of course, technically speaking, FAQs cannot be regarded as legal authority by taxpayers. For these and more, taxpayers still have to figure out the answer-and hope to work hard to make the right reports to help them avoid penalties when they are tried.
Even so, fortunately, the new guidelines are supplemented by the FAQ of the Revenue Decision 2019-24. This new tax ruling addresses common issues for taxpayers and tax practitioners regarding the tax treatment of hard forks and airdrops of cryptocurrencies. The IRS has specifically asked the public to comment on the latest guidelines and has provided taxpayers with at least one feedback channel. At present, the safest approach seems to be to report cautiously while revising and reporting historical transaction records. In some cases, a normal modification of a return or silent disclosure may be just a fine.
In other cases, a formal voluntary disclosure to the IRS may be appropriate. In either case, it is wise to do your best under the current regulatory guidelines, but also retain the possibility of adjusting to the new guidelines. You know, nothing is perfect. For the past five years, the IRS has not even reacted to cryptocurrencies at all. However, there is no doubt that the IRS intends to bring huge law enforcement and tax drivers into this brave new world.
Author Robert W. Wood is a tax attorney representing clients worldwide at Wood's San Francisco office. He is the author of many tax books and regularly writes about tax for Forbes.com, Tax Notes and other publications.