IRS sharpens focus on crypto transactions – Accounting Today

Millions of taxpayers who have failed to report their use or trading of virtual currency in the recent past may find themselves the target of a new IRS initiative called Operation Hidden Treasure — and only their CPA can help, according to experts.

In the seven years since the IRS first addressed the taxation of virtual currency in Notice 2014-21, the awareness level as well as the number of users and investors in the currency has mushroomed. The 2014 guidelines basically said that virtual currencies or cryptocurrencies are not currency at all, but property. As such, they generate income whenever they are sold or exchanged.

A John Doe summons issued to cryptocurrency exchange Coinbase in 2016 garnered millions of records of virtual currency users. The IRS further analyzed the topic in Revenue Ruling 2019-21 as to whether a taxpayer that holds cryptocurrency receives income from a “hard fork” in the chain behind the currency.

The IRS increased its focus on cryptocurrency this year by putting this question on Page 1 of the Form 1040: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Last year, the question was on Schedule 1.

And just last month, the IRS announced Operation Hidden Treasure to find taxpayers with unreported income from currency transactions. The operation is a collaboration of IRS Criminal Investigation and its Fraud Enforcement Office.

“This initiative includes a dedicated team of criminal investigators trained in virtual currency tracking,” said Kell Canty, the CEO of Verady, which makes Ledgible Tax Pro platform, a SOC-audited platform for tax planning and reporting of crypto-assets. “Coinbase, the biggest exchange, said they have over 53 million accounts. The size of crypto trading has gone through the roof, and a lot of people are making a lot of money at it. The IRS knows as a result of its subpoenas to exchanges that a lot of people are making a lot of money in virtual currency, but they’re not seeing anywhere near that number of returns mentioning those gains, which is why they’re going after them with a special division.”

“We estimate, conservatively, that 18 to 21 million taxpayers will need to consider cryptocurrency transactions in preparing their 2021 tax returns,” said Verady’s chief commercial officer John Wandrisco. “As the IRS starts doing more audits, people will turn to their CPA to help them untangle the transactions so they can report them.”

A cryptocurrency farming operation.

Christinne Muschi/Bloomberg

“I’ve talked to accountants who said that none of their clients are involved with cryptocurrency,” remarked Canty. “I think they honestly believe that, but it’s more likely that their clients are not telling them. Unlike stocks and bonds, there is no brokerage statement or 1099 for cryptocurrency, so it’s up to the taxpayer and the professional to figure everything out based on each individual transaction.”

Currently, there are more than 5,000 types of virtual currency. With a single taxpayer engaging thousands of transactions in a year, with each one generating figures to 18 decimal points, this can be prohibitively complicated.

“For CPAs, the first step is understanding the compliance obligations,” according to Canty. “Any transaction where crypto is exchanged for something of value is a taxable transaction. This covers everything from purchasing a cup of coffee to exchanging one crypto currency for another.”

“The second step is preparing for the advisory opportunities with crypto,” he added. “Operation Hidden Treasure will only increase the volume of 6173, 3174, 6174-A letters and CP2000 notices going out to taxpayers. Being prepared to advise clients and representing them in crypto audits will be a high-demand skill set for CPAs.”

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