If you’ve engaged in cryptocurrency or other virtual currency transactions worth $20,000 in any one year between 2016 and 2020, the IRS wants to hear from you. The IRS believes thousands of taxpayers are not telling the government about their income and investment gains from cryptocurrency transactions.
In a soft warning from the IRS, a “yes or no question” regarding cryptocurrency transactions began appearing on IRS approved tax return forms in 2019 and 2020. Taxpayers sign and date their tax returns in compliance with the new crypto asset class on 2020 taxes under penalties of perjury. An inaccurate answer is perilous.
Recent Coinbase, Circle, and Kraken summonses and litigations abundantly demonstrate the IRS‘ determination to narrow the Cryptocurrency Reporting and Revenue Collection Gap. Furthermore, this crackdown is an example of how publicizing one’s digital currency success could lead to unwanted consequences for promoters and taxpayers.
Understanding crypto tax reporting requirements
On April 1, 2021, in hard warning shots across the bow of cryptocurrency investors, a federal court in the Boston District of Massachusetts approved a “John Doe” summons to the digital currency exchange Circle Internet Financial Inc. Shortly thereafter on May 5, 2021, a federal court in the Northern District of California did the same for Payward Ventures Inc., and Subsidiaries d/b/a Kraken ( a digital currency exchanger headquartered in San Francisco, CA), seeking information regarding US taxpayers suspected of conducting at least $20,000 of cryptocurrency transactions during the years 2016 to 2020.
As early as 2014, the IRS was shifting its attention to cryptocurrency transaction reporting by issuing related notices and rulings. Since 2016, the IRS has been issuing “John Doe” summonses for cryptocurrency transaction information to digital currency exchanges.
Ignore reporting crypto transactions at your peril
A “John Doe” summons is the IRS equivalent of a subpoena. The IRS uses it for casting a “net” to locate the names of US Taxpayers that it has reason to believe are violating the law. It may serve a “John Doe” summons pursuant to IRC Section 7609(f) after a court proceeding in which the IRS establishes its information need to the satisfaction of a federal district court.
In 2016, based on IRS’ research reflecting that “only 800 to 900 persons electronically filed Form 8949 (the IRS form that reports Sales and Other Dispositions of Capital Assets) reporting cryptocurrency “sales” for the years 2013 to 2015, the IRS “John Doe” summonsed digital currency exchange Coinbase.
The Coinbase “John Doe” summons, (targeting 8.9 million transactions and 14,355 account holders) was investigating a reporting gap between the number of virtual currency users that Coinbase claims to have had during the summons period and U.S. bitcoin users reporting gains or losses to the IRS during the summonsed years.
The importance of compliance
As a result of a ruling in the litigation, Coinbase was: “ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
1. the taxpayer ID number,
3. birth date,
5. records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and all l periodic statements of account or invoices (or the equivalent).
It also should be noted that cryptocurrency exchanges are starting to report crypto activities to the IRS through From 1099-B, which means the IRS is likely to already be aware of some of your activities. That makes it all the more important that you and your specialized tax accountant understand how cryptocurrency tax reporting works so that you can stay compliant.
Who is your Specialized Tax Advisor?