In our recent blogs on the new Internal Revenue Service – Criminal Division (IRS-CI) priorities, we noted that new IRS-CI director John D. Fort has placed his department on high alert for tax fraud involving bitcoin and other digital currencies. Here, we discuss U.S. taxpayer noncompliance and various cryptocurrency tax schemes that are on the IRS radar.
Cybercrimes on the rise
The ability to purchase and trade digital currency anonymously on the internet puts it at the center of cybercrime. There are hundreds of digital currencies, and cryptocurrency is now the primary tool for money laundering. Cybercrime involving digital currency is now taking many forms, such as:
-“Crypto jacking” (taking over people’s computer browsers to fraudulently mine cryptocurrencies)
-Digital currency account takeovers
-Mining fraud through malicious botnets
-Scams against initial coin offerings (ICOs), from theft of funds to manipulating prices through “pump and dump” schemes
The IRS and taxing authorities worldwide are also attempting to track gaming-related laundering and the use of digital payment systems to hide funds.
The cryptocurrency tax threat
The IRS is searching for taxpayers who are noncompliant with their cryptocurrency reporting.
Most of the noncompliant taxpayers are individuals who fail to report capital gains from the sale or transfer of their digital currency holdings. The IRS is also pursuing companies that fail to report the purchase and sale of goods with digital assets, and/or that fail to pay employment taxes on cryptocurrencies used to pay their employees.
Attempts to make 1031 exchanges with digital currency is also under examination – the new tax rules only give tax benefits to like-kind exchanges of real property. The basis and all exchanges of virtual currency must be reported to the IRS.
The IRS is aware that many U.S. taxpayers are using cryptocurrencies in place of traditional bank accounts – Fort has expressed concern about the challenges faced by his investigators since people are now able to move funds from country to country without having to travel or to open overseas bank accounts.
Taxing authorities throughout the globe are working together to investigate and prosecute tax crimes involving cryptocurrencies. They are exploring ways to improve interagency cooperation, including: joint investigation frameworks, mandatory exchanges of information, sharing of experts, more comprehensive training for tax auditors, and ongoing meetings between auditors and prosecutors.
Consequences of taxpayer noncompliance
Any and all income from cryptocurrency transactions must be reported on your tax returns, and the failure to do so can result in fines of up to $250,000 and prison time.