36 Chambers of Crypto Taxes Series
1st Chamber: IRS Cryptocurrency Tax Enforcement
Why the series title? I’m a huge Wu-Tang Clan fan. Their first album was named Enter the Wu-Tang (36 Chambers). This album changed my life and hip hop forever. It is my goal to change the way complex tax and business issues can be explained to the masses.
Reminder: What is a cryptocurrency?
Cryptocurrency is a digital currency that uses encryption techniques, rather than a central bank, to generate, exchange, and transfer units of currency. Unlike cash transactions, no bank or government authority verifies the transfer of funds. Instead, these virtual transactions are recorded in a digitized public ledger called a “blockchain.” Individual units of the currency are called “coins.”
Take minks off! Take things off!
Take chains off! Take rings off!
Braclets is yapped, Fame came off!
[Ante Up!] Everything off!
Fool what you want, we stiflin fools
Fool what you want? Your life or your jewels?
The rules, (back ’em down), next thing (clap ’em down)
Respect mine we Brooklyn bound, (bound!) now, (now!)
-Lil Fame (MOP), Ante Up
The above rap verse is what I imagine the IRS was playing loudly when the value of bitcoin was skyrocketing back in 2017. So many people talking about Lamborghinis and popping bottles at the strip club on social media. While this was going on, the possible tax revenue of cryptocurrencies was finally got on the radar of the IRS. Rule number of “popping bottles” on social media is that you better have a good explanation of how you got the money during tax filing time. Don’t talk about all the money you got selling bitcoins but report that you made no money on your tax returns. Based on a report from the Treasury Inspector General for Tax Administration (TIGTA) in August 2017, the IRS announced concern over “massive” underreporting of income generated by cryptocurrencies. The report included specific compliance issues and tax guidance for cryptocurrency investors. This was the IRS first warning shot.
The second warning shot was when the IRS went as far as to issue a “John Doe” summons to Coinbase, one of the largest cryptocurrency exchanges, requesting the release of transactions from 2013 to 2015. On November 28, 2017, the Federal District Court for the Northern District of California entered an order requiring Coinbase to provide the IRS with data on many of its clients who engaged in transactions exceeding $20,000; Coinbase added the tax reporting of capital gains and losses to this information. This serves as a notice that the IRS will be able to find you in any situation when it is on their radar. I keep on telling my clients to stop acting like they are smarter in the IRS. Most people like to underestimate the IRS power of receiving information.
The third warning shot just went off in the summer of 2019 when the IRS started sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The IRS started sending the “educational letters” to taxpayers. The names were obtained through various ongoing IRS compliance efforts. By the end of summer 0f 2019, more than 10,000 taxpayers received these “educational” letters. For the lucky taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help them understand their tax and filing obligations and how to correct past errors. In my world, IRS “educational letters” means that the IRS is getting closer to auditing you if you don’t get your act together.
You can go about reporting your reportable cryptocurrency transactions either the hard or easy way. The hard way is disregarding the letters because you feel that you are untouchable. You can play this game all you want but interest and penalties amount if you lose are legendary. The easy way is going to your accountant to file amended tax returns. My question to you is “how many warning shots will it take for you to see that the IRS is preparing for war?” To date, no exchanges are required to report cryptocurrency transactions on Form 1099-B. It is my opinion that by 2021, there will be no more IRS warning shots. By 2021, the IRS will come for blood. Most people will complain that it isn’t fair. However, you have been warned for many years. Now, is the time to go see your accountant about your crypto tax needs. Don’t wait until 2021 when you receive a nasty audit letter.
Until next time……Blockchain 4 The People!!!!!
Need help with your crypto taxes? Contact me at jamaal@jstaxcorp.com
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Crypto-J Means Business podcast: https://anchor.fm/jamaal-solomon