By Laura Saunders
Cryptocurrency holders, beware: A surprising change to your 2020
tax form is about to strip away excuses for ignoring the tax rules
on bitcoin, ether or other digital currencies.
The Internal Revenue Service plans to alter the standard 1040
form by putting this question on the front page: At any time during
2020, did you sell, receive, send, exchange or otherwise acquire
any financial interest in any virtual currency? The taxpayer must
check the box "Yes" or "No."
The crypto question first appeared on the 2019 tax form, but on
a part of the return that not all filers had to answer. Now it's
moving to the 1040's most prominent spot, just below the taxpayer's
name and address.
The IRS's move is a strong warning to millions of crypto holders
who aren't complying with the law that they must file required
forms they may see as burdensome and pay taxes they may think are
unfair. It has impressed tax specialists.
"This placement is unprecedented and will make it easier for the
IRS to win cases against taxpayers who check 'No' when they should
check 'Yes, '" says Ed Zollars, a CPA with Kaplan Financial
Education who updates tax professionals on legal developments.
Mr. Zollars notes that U.S. tax authorities have already
succeeded with a similar strategy: A simple tax-return question
about offshore financial accounts greatly aided their crackdown on
Americans hiding money abroad. Since 2009, it has brought in more
than $12 billion from individuals.
By changing the position of the crypto question and having all
1040 filers respond to it, the IRS making it much harder to claim
ignorance of the rules. Lying on a tax return is a bad idea because
filers sign returns under penalty of perjury, and juries often side
with the IRS when it's clear a taxpayer has lied.
The change to the crypto question and other recent actions show
the IRS is taking cryptocurrencies seriously as a threat to the tax
system, whether the noncompliance is by enthusiasts who owe little
or by sophisticated international criminals. In two recent nontax
criminal cases -- one involving theft by North Korea and the other
involving the sale of child pornography by a Dutch national -- the
IRS has provided key assistance because of its growing expertise in
cryptocurrencies.
The agency is right to be worried about noncompliance, say
specialists. Coinbase, a leading cryptocurrency exchange and
custodian, said it had 35 million total accounts as of July.
Chainalysis, a firm that provides crypto investigations software,
estimates there were at least 3.1 million active accounts using the
popular bitcoin currency in the U.S. between June 2019 and July
2020.
The IRS won't say how many taxpayers have checked the crypto box
for 2019. But Dan Hannum, chief operating officer of ZenLedger, a
crypto tax-prep software firm, thinks a total of fewer than 150,000
crypto owners filed required tax forms for 2017, 2018, and 2019,
based on his industry knowledge.
For their part, many crypto users are angry with the IRS's
guidance, which treats bitcoin, ether and their kin as property
rather than currency. So if a crypto holder uses it to buy
something or exchanges one cryptocurrency for another, there's
usually a capital gain or loss to report on the tax return.
"Buying a sandwich with cryptocurrency shouldn't be a taxable
event," says Sean Cover, a New York City cryptocurrency holder who
works in finance for a nonprofit group. He says that in 2017 he had
more than 500 transactions on several platforms, and it took him 10
hours to prepare his crypto tax forms even though he paid for
special software.
Like some members of Congress, Mr. Cover supports a $200
threshold before crypto transactions would need to be reported. The
IRS says it's up to Congress to change the law.
Tax professionals also have concerns. Earlier this year, the
American Institute of CPAs sent the IRS officials a 28-page letter
taking issue with its guidance that said the crypto received from
reorganizations called forks and marketing giveaways called
airdrops can be taxable to recipients. It asked for other
clarifications as well, such as for reporting offshore holdings of
cryptocurrencies.
Meanwhile, the IRS is forging ahead with other crypto compliance
measures. Earlier this month, it offered rewards up to $625,000 to
code-breakers who can crack so-called privacy coins like Monero
that attract illicit activity because they claim to be
untraceable.
In late August, the agency released guidance affirming that
taxpayers who receive crypto for completing "microtasks" must
declare it as income. This applies to users of firms like StormX,
which makes tiny payments in crypto to people who do small tasks
such as playing games, answering surveys, or evaluating
products.
The IRS is also sending a new round of letters to crypto holders
who may not have complied with the tax rules, expanding on last
year's mailing of about 10,000 letters. Tax specialists say the
recipients are often customers of Coinbase, which was ordered by a
federal court to turn over information on some accounts to the
IRS.
Chandan Lodha, the chief operating officer of Cointracker, a
software firm selling crypto tax-prep services, says many of its
new customers are seeking help not just with 2019 forms (due Oct.
15 for taxpayers with extensions) but also for earlier years --
presumably to amend prior returns.
He adds, "Based on what we're seeing, people are starting to get
scared."
(END) Dow Jones Newswires
September 25, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.