It seemed too good to be true. And, like all things that appear that way, it was. Virtual currency. Cryptocurrency. It was like a dream come true for investors. Tax free income on something that most people found impossible to understand, let alone to track and tax! Well, the IRS has found out how to get to some of the U.S. taxpayers who hold virtual currency accounts. And now they are going after them. So, it’s time to face the music.
So Much For Privacy
The IRS started sending the ‘educational’ letters to taxpayers mid-July. By the end of August, more than 10,000 taxpayers will receive these letters. But just how did the IRS get all these names that were supposed to be untraceable? According to the IRS, “The names of these taxpayers were obtained through various ongoing IRS compliance efforts.”
Fact is, back in 2014, the IRS classified all virtual currencies as property for tax purposes, meaning that much like a home, the assets can be sold at a profit and trigger tax implications. The agency served a summons against digital currency exchange Coinbase, seeking details about customers who traded digital currencies from 2013 to 2015. Funny how IRS pressure can turn the tightest privacy promises into loose lips.
Take It Seriously
IRS Commissioner Chuck Rettig said, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations. Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”
You Can Run But You Can’t Hide Forever
If you receive a letter, it will be too late for you to be eligible for an IRS voluntary disclosure program in exchange for the potential to reduce penalties or avoid criminal prosecution. However, if you have not received a letter, you simply don’t know what the IRS knows. Even if you have not been notified and may have underpaid or avoided taxes for virtual currency transactions, you could seek some relief by coming forward before the IRS finds you. In other words, it’s better to fess up now.
When you consider that since the IRS began their concerted efforts in 2009 to go after Americans who hid money offshore, they’ve found more than 56,000 who have subsequently paid more than $11 billion to resolve tax issues, you know the IRS is just getting started on the cryptocurrency tax targets.
You don’t have to be a big player in the cryptocurrency world. Smaller investors are also feeling heat. Many traded during last year’s price spike. If your tax preparer asked about cryptocurrency sales and you did not report it, remember that’s a criminal offense. You’ve put your tax preparer at risk since it’s illegal for them to sign off on returns with unreported income.
If You Failed To Report
If we prepared your taxes and you forgot to mention your cryptocurrency accounts, give us a call. We can amend your return and may be able to negotiate for reduced penalties before the IRS finds you on their own.
Barry Fowler, EA
Taxation Solutions, Inc.