The Feds Are Watching: 3 Things To Know About Crypto Tax Evasion, A Crime

The Feds Are Watching: 3 Things To Know About Crypto Tax Evasion, A Crime

crypto tax
The Feds Are Watching: 3 Things To Know About Crypto Tax Evasion, A Crime. Photo: cottonbro from Pexels

The Internal Revenue Service is paying an extraordinary amount of attention to cryptocurrency-related taxes. It wants you to know that crypto tax evasion is a criminal offense, and it wants you to be afraid. Be very afraid.

Fear appears to be working.

Chandan Lodha is chief operating officer of CoinTracker, a software firm selling crypto tax-prep services. Many of the company’s new customers are seeking help, not just with 2019 forms but also for earlier years—presumably to amend prior returns, Lodha told Wall Street Journal.

“Based on what we’re seeing, people are starting to get scared,” Lodha said.

Here are three things to know about crypto tax evasion.

1. IRS changed the standard tax form

The IRS moved this question to the front page of the standard 1040 form: At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? 

The question appears just below the taxpayer’s name and address. It’s the first question you’ll see and you have to check the box “yes” or “no.”

2. The government made an example out of a Silicon Valley legend

The government made an example out of Silicon Valley legend John McAfee, an antivirus software pioneer and former presidential candidate who was recently arrested in Spain on tax-evasion charges, the U.S. Justice Department said in an Oct. 5 announcement. The U.S. is seeking McAfee’s extradition.

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McAfee allegedly earned millions in income from promoting cryptocurrencies, consulting work, speaking engagements, and selling the rights to his life story for a documentary. From 2014 to 2018, McAfee allegedly failed to file tax returns. He evaded taxes by paying income into bank and crypto-exchange accounts in other people’s names. He is accused of concealing assets including real property, a vehicle and yacht.

3. The government treats crypto as property

U.S. Attorney General Bill Barr’s Cyber Digital Task Force this month issued a report outlining enforcement against cryptocurrency-related crimes. Tax evasion is one of the three major ways bad actors use cryptocurrency, Forbes reported.

Tax evaders can be fined up to $100,000 ($500,000 for corporations) or imprisoned up to five years plus the cost of prosecution.

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The IRS treats virtual currency as property for tax purposes, which means that the general tax principles that apply to property transactions also apply to virtual currency transactions. It also means the I.R.S. can seize your cryptocurrency.

Income, including capital gains, from virtual currency transactions is taxable, and virtual currency transactions themselves must be reported on a taxpayer’s income tax return. Wages paid in virtual currency to employees are also taxable, reportable on a Form W-2, and subject to withholding and payroll taxes.

“Tax cheats may believe that the Internal Revenue Service is not able to uncover or attribute their cryptocurrency transactions, and they may
even use additional anonymizing features of cryptocurrencies to further obfuscate their transactions,” according to the report. “Tax cheats may then attempt tax evasion by, among other things, not reporting capital gains from the sale or other disposition of their cryptocurrency, not reporting business income received in cryptocurrency, not reporting wages paid in cryptocurrency, or using cryptocurrency to facilitate false invoice schemes designed to fraudulently reduce business income.”

Read more: Looking For You, Bitcoin: IRS Moves Surveillance Crypto Question To The Top Of Page 1 On 1040 Tax Form