Investors who can stomach the wild swings of cryptocurrency’s rapid fluctuations should be forewarned: the IRS is fortifying its efforts to regulate crypto assets and enforce investor’s tax reporting and payment obligations. How investors proceed is critical.
In 2014, the IRS released initial guidance on cryptocurrency, defining it as property subject to federal taxes on its use, including sales and exchanges for other types of property, payments for goods and services, and investment purposes. For example, a taxpayer who receives cryptocurrency as payment in exchange for goods or services would need to report and pay ordinary income tax on the fair market value of those tokens in the year of receipt. Taxpayers who hold cryptocurrency as an investment owe capital gains tax on the excess amount of the tokens’ fair market value on the date of sale above the original tax basis. However, the anonymity offered by these transactions and general lack of governmental oversight has resulted in a tremendous amount of underreporting of cryptocurrency transactions on tax returns. In fact, the U.S. Treasury estimates that there is multi-billion-dollar difference between the amount of taxes owed on cryptocurrency transactions and the actually amount paid to the government.
With the rise in cryptocurrency mania over the past year, federal agencies have been busy working to unmask users of crypto assets and improve tax-reporting compliance. For example, the administration proposed increasing the IRS budget for 2022 by $1.2 billion to help the agency ramp up its tax enforcement efforts. At the same time, the IRS put together a team of cryptocurrency-trained criminal investigators to focus on weeding out tax evasion while announcing it would begin using software capable of reviewing taxpayers’ returns and identifying all unreported cryptocurrency gains and losses. More recently, the Treasury Department, citing the “broad use of cryptocurrency to facilitate illegal activity,” proposed a requirement that all transfers of cryptocurrency with a fair market value of more than $10,000 be reported to the IRS.
Based on recent court cases, it appears that the government efforts are working. A few years ago, the IRS received approval to issue John Doe summonses to Coinbase’s customers, advising them to come clean about their unpaid taxes on cryptocurrency transactions or risk significant penalties of as much as 75 percent of the unstated tax liabilities and criminal charges. Just this year, a federal court ruled in favor of the IRS, requiring two cryptocurrency exchanges to identify and share with the agency the records of users with more than $20,000 in annual transactions during the years 2016 through 2020.
As cryptocurrency reporting enforcement continues to pick up, investors should err on the side of caution and prepare to report all of their virtual currency transactions to taxing authorities. It is far better to be forthright and self-report than it is to be exposed by a government-authorized release of investor information.
About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and CPAs, and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-8888 or via email at firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Posted on July 21,2021