The Treasury Department announced that it is taking steps to crack down on cryptocurrency markets and transactions and said it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service. The IRS sees cryptocurrency as a high tax evasion risk – they're working to stay on top of it and staffing up to scrutinize cryptocurrency tax reporting.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the Treasury Department said in a release.
“This is why the President’s proposal includes additional resources for the IRS to address the growth of cryptoassets,” the department added. “Within the context of the new financial account reporting regime, cryptocurrencies and cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies would be covered. Further, as with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on.”
Bitcoin reversed its steep negative trend shortly after the Treasury’s announcement and was last seen trading up 1.6%, according to Coin Metrics. Previously in the session, it was up more than 9%.
The IRS will be taking a more proactive role in dealing with tax evasion through cryptocurrency tax reporting (or lack of)
A growing number of Wall Street analysts have over the past month sounded the alarm that regulators at the Treasury and the Securities and Exchange Commission could soon take a more active role in cryptocurrency regulation.
The Treasury Department’s release came as part of a broader announcement on the Biden administration’s efforts to crack down on tax evasion and promote better compliance. Among proposals officials are considering are bolstered IRS funding and technology, and more severe penalties for those who evade their cryptocurrency tax reporting obligations.
The Treasury Department notes that wealthy tax filers are often able to escape paying fair taxes through complex schemes that the IRS currently doesn’t have the resources to disrupt. According to the report, the IRS collects 99% of taxes due on wages, but that number is estimated to be as low as 45% on non-labor income, a discrepancy that hugely benefits high earners with “less visible” income sources. The Treasury calls virtual currency, which has some reporting requirements but still operates mostly out of sight in regulatory grey areas, a particular challenge.
“These opportunities are particularly available for those in the top end of the income distribution who can avoid taxes through sophisticated strategies such as offshoring, creating complex partnership structures, or moving taxable assets into the crypto economy,” the Treasury report states.
According to the Treasury’s estimates, the difference between taxes owed to the U.S. government and those actually paid totaled nearly $600 billion in 2019.
The SEC will likely regulate cryptocurrency
Increased regulation will likely upset some cryptocurrency investors, who have seen the value of bitcoin slide about 25% over the past month and talk of capitulation creep into online forums.
With longtime cryptocurrency expert Gary Gensler at the head of the SEC, Raymond James expects it’s only a matter of time until Congress grants the regulator broader jurisdiction.
He told lawmakers earlier this month that allowing the SEC to regulate cryptocurrency exchanges will help ensure investors are protected and prevent market manipulation.
“Chairman Gensler is viewed as a potential ally for cryptocurrencies as a former professor on the topic; however, these statements are likely to revisit debates regarding the regulatory risk to cryptocurrencies and exchanges,” Raymond James analyst Ed Mills wrote earlier in May.
Regulation will be a frustration for bitcoin owners in the short-term
“In the short-term, this could cause headline risk,” he added. “However, in the medium-to-long term, regulation would add further legitimacy to the asset class and could provide a regulatory moat around existing cryptocurrency exchanges.”
While involvement by the Treasury Department and the SEC may ultimately prove a boon for cryptocurrency investors, any near-term regulatory hurdles will likely come as another bother for investors in bitcoin, dogecoin, and the like.
Those sentiments were echoed by Miller Tabak last month, when the firm told clients that “cryptocurrency markets are not properly considering legal risk.”
“Confirmation of Gary Gensler as SEC Chairman, and cryptocurrency volatility over the weekend following rumors of tighter regulation, highlight the regulatory risks facing this industry,” strategic economist Paul Shea wrote in April.
“The difference in regulatory risk and progress as a means of payment raises an important question: are other coins’ recent success due to good news about them or are they piggybacking on positive sentiment related to bitcoin?” he added.
Democrats and Republicans alike have made cryptocurrency regulation and scrutiny a top priority in 2021
As run-ups in the price of bitcoin and other digital assets last year sparked concerns of market manipulation and uninformed retail investments, lawmakers on both sides of the aisle are seriously looking at regulating all digital assets.
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
The IRS issued IRS Notice 2014-21, IRB 2014-16, as guidance for individuals and businesses on the tax treatment of transactions using virtual currencies.
The IRS also published Frequently Asked Questions on Virtual Currency Transactions for individuals who hold cryptocurrency as a capital asset and are not engaged in the trade or business of selling cryptocurrency.
We here at Tax Problem Solver know cryptocurrency and we're here to protect traders from errors in cryptocurrency tax reporting and potential audits. So if you're involved in cryptocurrency and not sure where you stand with the IRS, please get in touch and we'll help you get things sorted out. Virtual currency is not a loophole or way around the IRS in any way.
Contact me by one of the methods below in the blue box, or you can email me at Larry@TaxProblemSolver.com and we can dive into your specific issues and solve them. You can also click here to book a free consultation with me or a member of my team.
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