IRS goes after crypto taxation, but it’s doing it all wrong
A week ago, the U.S. Internal Revenue Service (IRS) revealed that it had kicked off a campaign whose purpose was to enforce crypto taxation. According to a press release by the agency, over 10,000 crypto holders will receive letters for either failing to report their crypto income and pay the taxes due or for doing it incorrectly.
IRS Commissioner Chuck Rettig warned about the consequences those who ignored the letter would be exposing themselves to, urging crypto holders to “take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”
However, despite this latest wave of letters, the IRS is still lagging behind in the relatively new sector. Wendy Walker, the solution principal at Sovos, believes. Speaking to CoinGeek, she said that while cryptocurrencies have evolved greatly in the past few years, the agency’s regulation for the sector is still as vague as it was five years ago. In April 2014, the IRS issued Notice 2014-21 to provide guidance on crypto taxation. The notice, which was understandably vague and scant, is still the only guidance the agency has issued to date. It states that crypto should be treated as property for the purposes of taxation. That the CFTC and the SEC have different definitions for crypto doesn’t help.
And it’s not just the crypto community that has called on the IRS to issue more guidance on crypto taxation. Members of Congress, led by Minnesota Rep. Tom Emmer have urged the agency to shed light on the issue, with Rettig stating that he has “made it a priority of the IRS to issue guidance.”
Despite the promise, no guidance or regulation has been forthcoming.
Granted, taxing cryptocurrencies is not an easy field to maneuver. Several other countries have had a similarly difficult time with the sector. In Australia, tax experts have been protesting the country’s ‘crazy’ tax laws; in Brazil, the government is seeking to invade crypto exchanges to collect information on crypto users; while in Japan, the government has resulted to hiring tax specialists to go after tax-evading crypto users.
Despite the vague laws, tax payers must comply, Walker believes. She stated, “Even though the rules could be clearer, non-compliance for both cryptocurrency platforms and investors is not an option. Investors face potential prosecution for non-reporting, while cryptocurrency exchanges could face massive maximum fines of nearly $3.3 million for late or incorrectly filed forms.”
The man who created Bitcoin, Dr. Craig S. Wright, concurs, stating in a blog post last month, “Like it or not, Bitcoin and other cryptocurrencies do not stop you from paying tax. They are not designed for such a purpose. Rather, they can facilitate fair taxation.”
And for crypto investors, Walker’s advice is to ensure they have all the information they need before commencing the taxation process. She commented, “Investors need to make sure they have all of the information they need for calculating gains and losses before they file their taxes. With some exchanges issuing 1099’s, others not issuing forms at all, and still others issuing different forms for the same types of transactions, it is important that the taxpayer ensure they have all of the information they need including dates of all assets purchased and sold and the corresponding values of the assets on those dates.”
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