By Clinton Donnelly
Staying informed and compliant with tax regulations is extremely important, especially with the IRS increasing its focus on crypto transactions. In fact, 75% of U.S. crypto traders are now under scrutiny, particularly those who have not been reporting their crypto income on their tax returns. This blog post covers important developments that all crypto traders should be aware of in order to steer clear of potential legal issues.
The Spotlight on Non-Reporting
The IRS is aware that many cryptocurrency traders, both small and large, are not reporting their crypto income on their tax returns. While the IRS is concerned with a wide range of crypto traders, its main focus is on those with significant trading activities. This should be a wake-up call for anyone involved in the crypto market to ensure their tax affairs are in order.
Understanding the 1099-DA and Its Implications
A key development that has caught the crypto community's attention is the introduction of the draft form for the new 1099-DA for digital assets. This form is pivotal because a new law requires that all U.S.-based crypto brokers, including DeFi exchanges and unhosted wallet providers, to report every trade. Crucially, this includes the wallet addresses and transaction hash numbers involved in the transactions. The implications are clear: this information will directly feed into the IRS's systems, significantly enhancing their ability to track unreported income.
The Case of Bitcoin Jesus: A Cautionary Tale
The indictment of Roger Ver, often referred to as Bitcoin Jesus, sheds light on a new technique used by the IRS called cluster analysis which effectively portfolio reconstruction. By gathering known Bitcoin addresses associated with Ver and employing blockchain cluster analysis tools alongside AI technology, the IRS uncovered a discrepancy between Ver's reported assets and his actual holdings in 2014. This method of portfolio reconstruction represents a significant advancement in the IRS's ability to detect tax evasion.
The IRS's Strategic Use of AI and Machine Learning
The IRS is not stopping at traditional methods of tracking and auditing. The strategic operating plan released by the commissioner highlights an aggressive approach towards leveraging AI and machine learning tools to unravel the complexities of cryptocurrency transactions. This technological pivot aims to identify discrepancies in reported income and actual transactions, making it increasingly difficult for non-reporting individuals to remain under the radar.
The Indictment of Paco: A Warning Sign
A recent indictment in March 2024 serves as a stark warning. A trader known as Paco was indicted for failing to report Bitcoin sales in 2017, leading to criminal tax evasion charges. The consequences are severe, including a potential $250,000 penalty and up to three years in prison. This case underscores the seriousness with which the IRS is pursuing those who fail to report their crypto transactions.
The Path Forward
For crypto traders who have been flying under the radar, the message is clear: the days of hiding are over. Compliance is not optional, and the IRS now has sophisticated tools and a determined stance to ensure everyone pays their fair share. To avoid the severe consequences of non-compliance, traders should take immediate steps to rectify any past oversights and ensure all future transactions are accurately reported.
It is important to stay informed and seek professional advice when dealing with cryptocurrency. CryptoTaxAudit offers personalized tax strategies to help you get back in compliance. Contact us today for a private consultation on how to come into compliance. Contact us at CryptoTaxAudit today. Your future self will thank you.
