IRS Takes Aggressive Posture on Crypto Taxes

For nearly a decade now, Bitcoin and other digital assets have flown somewhat under the radar when it comes to tax law.  While the IRS officially registers them as property, with profits on their sale falling under capital gains taxes, the very nature of how exchanges are set up has historically made profits in this space very difficult for the IRS to track.

Enforcement agents at the IRS have certainly noticed; a court decision in northern California in early May gave the IRS permission to file a John Doe summons against Kraken to collect information on taxpayers they don’t know, under the theory that some wrongdoing has happened. This more aggressive posture was further reinforced at a Tuesday hearing before the Senate Finance Committee, when IRS Chief Charles Rettig proposed not only an increased $32 million in crypto enforcement for 2022, but also explicitly called upon Congress to give the agency more authority to take enforcement actions in this space.

“We get challenged frequently, and having a clear dictate from Congress allowing that information is critical,” Rettig said in his remarks to lawmakers. “The most recent market cap in the crypto world exceeded $2 trillion, and there are more than 8,600 exchanges worldwide.”

The specific proposal being called for would give the agency more authority to collect information from businesses that have received crypto assets in excess of $10,000.

In many ways, it’s not a surprising move; the Biden administration has made clear in recent months its desire for tighter regulations in the digital currency space, and the IRS has been taking increasingly sophisticated steps in this space as far back as a 2016 order to Coinbase to turn over information on account holders who have failed to pay federal taxes on profits.

And there is, to be certain, evasion taking place. Credit Karma reported in 2018 that fewer than 100 of the first 250,000 federal tax returns filed using the service showed any cryptocurrency gains or losses – a clearly-massive underreporting, with at the time nearly 5% of the population reported as owning cryptocurrencies.

However, understanding precisely what you owe remains somewhat nebulous – and certainly complex. Short-term gains – those made within a one year period – aren’t too complex, taxed at the same rates as ordinary forms of income. However, for longer-term gains, the formula gets more complex, if generally more advantageous to investors – but that’s without getting into the complexities of capital losses in the extremely volatile crypto markets.