Crackdown on Lost Cryptocurrency Revenue Underway

May 31, 2022 | Blog, Uncategorized

A crypto tax attorney would probably be the first to tell you that a crackdown is underway by the Internal Revenue Service. This is because it has discovered that it may actually be forfeiting as much as $50 billion annually in unpaid taxes from those who regularly use cryptocurrency.

A Significant Tax Gap

In a recently released analysis by Barclays, Joseph Abate, its managing director, stated that the tax gap from crypto trades was estimated at $50 billion per year, and that the IRS is sitting up and paying attention. The tax gap refers to the amount of revenue the IRS is owed in comparison to the actual amount collected. Currently, the crypto tax gap represents 10 percent of the nation’s overall tax gap.

According to Barclays, the gap may be even greater because those numbers were extrapolated from 2017 data, and now there is far more decentralized finance activity that was essentially nonexistent in 2017. Decentralized finance, often simply referred to as DeFi, is a term for systems that run on cryptocurrency, as opposed to traditional financial institutions that run on conventional currency. According to IRS tax attorneys, most DeFi activity runs on the Ethereum blockchain.

Even though transactions on the blockchains are visible, if counterparties have anonymity, it is not easy for the IRS to determine who owes taxes. This is why Joseph Abate believes that $50 billion is probably too low an estimate for the crypto tax gap.

Crypto Users Should Report All to Avoid Negative Consequences

Crypto traders should not make the mistake of thinking that they can get away with not paying taxes on gains made from transactions. In fact, because the IRS is planning to crack down significantly on this type of activity, users of this currency should be more diligent than ever with regard to keeping good records and reporting any and all gains. Crypto tax lawyers should be consulted by those who are concerned about the repercussions of underreporting.

One crypto tax attorney pointed out that the first red flag was probably raised when an item was added to all 1040 forms, which specifically addressed crypto gains and demanded a yes-or-no answer about such activity. If a person answered “No” to the question about whether or not crypto gains were made, then that person opened themselves up to a willful negligence charge, fines, or a lengthy IRS audit if there was, in fact, profit that was concealed.

The Importance of Detailed Records

Tax attorneys in San Jose recommend that crypto traders be up-front and honest on their tax returns regarding crypto sales and purchases made throughout the tax year. It is also important to remember that IRS audits are typically two years behind, so even filers who failed to report gains in the past and thought they got away with it may still get targeted for an audit and fines at a future point in time.

The best way to avoid the negative consequences of owing back taxes or being audited is to keep detailed records of any transactions so that questions from the IRS can be answered without any problem should they come up. In other words, cryptocurrency users should approach their activity as if it were not in any way anonymous. With the new crackdown, this is essentially true, and the IRS is serious about getting back monies owed from negligent or deceptive taxpayers. Those who think they may have tax problems or are unclear about tax regulations should speak to a crypto tax attorney for guidance and advice.