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Increased IRS Crypto Tax Enforcement & What It Means for You

Published
October 6, 2020
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    According to a recently posted Wall Street Journal report, the IRS is gearing up to deploy a change to the 2020 tax form that directly affects crypto investors.

    Increased IRS Crypto Tax Enforcement

    By now, it is no secret that there is an ongoing plan for increased IRS crypto tax enforcement. For context, 2019 was the first time the IRS asked if an individual had participated in buying, selling, or holding digital assets by putting the question on the Schedule 1 form - not necessarily requiring an answer.

    But fast-forward just 1 year later, and the IRS has chosen to highlight the cryptocurrency question on the first page and place it above the fold on the Standard 1040 tax form.

    Standard 1040 Virtual Currency Question

    On the 1040 form for 2020 filings, the IRS is now requiring an answer to this question.

    “At any time during 2020, did you sell, receive, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

    You must either check “Yes” or “No”.

    ZenLedger’s Chief Operating Officer, Dan Hannum, gave an interview for the WSJ report and was asked how many taxpayers he thought actually checked the crypto box on the 2019 form.

    “I think fewer than 150,000 crypto owners filed required tax forms for 2017, 2018, and 2019, based on my current knowledge.”

    This number will obviously increase next year, as global users holding crypto assets now top over 100,000,000. 

    What Does The Form 1040 Question Mean For Crypto Investors?

    The IRS is getting more serious about compliance and all crypto gains, losses, and even passive income from staking or interest-bearing wallets should be reported on your taxes in 2020. Even if you have multiple exchanges and wallets spread across various platforms, you’ll need to gather all of your transactions and report on them.

    To hear the specifics steps you should be taking to ensure you're accurately reporting crypto transactions on your tax returns, check out our on-demand webinar; have a listen here.

    Thankfully, ZenLedger can help you easily file your taxes with our crypto tax software as we offer integration with all major players and full DeFi support. We can even help you amend previous tax year forms! The best part: ZenLedger has live support available daily via online chat, email, phone/text, or by appointment - we want to help you succeed in navigating these waters.

    There is no doubt that there will be increased IRS crypto tax enforcement on crypto taxes and accounting moving forward, but with ZenLedger and our crypto tax calculator and experienced team, we can help take away the stress and simplify the complicated bits.

    IRS Form Samples:

    2019 Schedule 1 Form

    2020 Sample 1040 Form

    The Bottom Line

    Regulators are poised to commence a flurry of IRS crypto tax enforcement actions related to virtual currency tax. Institutions and entities in the industry should prepare their compliance programs now to guard against fraudulent activity and unnecessary federal scrutiny and investigation.

    FAQs

    1. Does the government track crypto?

    Major crypto sellers and exchanges must comply with government laws and regulations, including sharing your account and transaction info. And most crypto, including Bitcoin, are not anonymous and your entire crypto net worth can be tracked.

    2. Is Cryptocurrency reported to the IRS?

    The Internal Revenue Service considers cryptocurrency to be property for tax purposes. This means that your virtual currency is taxed in the same way as any other assets, such as stocks or gold.

    3. How does the IRS know you sold Crypto?

    Owing to the “matching” mechanism embedded in the IRS Information Reporting Program (IRP), crypto exchanges are required to create forms 1099-K or Form 1099-B for the users who have more than $20,000 in proceeds and 200 transactions in a crypto exchange. While a copy of these forms is sent to the account holder, an extra copy is sent to the IRS. Hence, if you receive a Form 1099-K or Form 1099-B from a crypto exchange, the IRS knows that you have reportable cryptocurrency transactions. If you fail to include these amounts in your return, the IRS computer system automatically flags your returns for under reporting and your earnings could cause you a major headache in the form of heavy penalties.

    4. Is Bitcoin tax evasion?

    Virtual currencies like Bitcoin and Ethereum offer a way to protect your income from the IRS, but in most situations, they are still trackable by the IRS.


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