IRS Investigating Crypto and Crypto Use Like Never Before
There’s what Dubai is doing to encourage crypto adoption and use, and then there’s this. Whatever this is, it’s the opposite what supporting an emerging technology looks like.
The days of the IRS looking at crypto like it’s some new TikTok viral dance are over. Like Big Paulie in Goodfellas, the Tax Man wants its cut and it’s going to get paid. As we’ve written, the IRS has hired hundreds of new agents and are bringing a new focus specifically to crypto and digital assets.
Along with its substantial funding boost, the IRS created the Office of Cyber and Forensic Services, bringing together its digital asset investigation, cybercrime investigation, digital forensics, and physical forensics support divisions under one command. They claim they are able to trace essentially any crypto transaction.
The US government, including the IRS, has become increasingly sophisticated when it comes to finding your crypto. Multiple agencies, including intelligence services, work with blockchain analysis firms like Chainalysis to track crypto associated with criminal behavior.
So if the IRS doesn’t have sufficient in-house crypto knowledge, someone else will.
You can see that the IRS is paying more attention to crypto on your tax forms. From 2023, Form 1040 will ask whether US taxpayers held any digital assets in the past year.
“The IRS knows about your crypto already,” says Talwar. “Crypto exchanges are compelled to share customer data with the IRS. In November 2022, the IRS confirmed it’s building hundreds of cases relating to crypto tax evasion.”
“It’s important to remember that data on public blockchains are inherently traceable, so it is important to be upfront when it comes to your taxes. The IRS can request powers to dig into exchange transactions and can use blockchain tracing technology to track crypto in audits and investigations.”
Losses and Theft Should Still Be Declared
2022 was a terrible year for the crypto markets, and this may be reflected in your portfolio. However, this can be a benefit for your tax bill.
“Many investors’ portfolios are currently in the red – particularly those who started crypto trading during 2021,” continues Talwar. “For those sitting on losses this year, they may believe that they have no tax obligations. However, declaring losses can be useful in order to carry forward these losses against gains over future financial years.”
Starting from 2023, crypto investors are not permitted by the IRS to report their lost or stolen crypto as a capital loss. This is due to the elimination of tax deductions for casualty and theft losses under the Tax Cuts and Jobs Act. As a result, if you have lost your crypto due to a scam, hack, or losing your private keys, you will not be able to claim a deduction on your taxes.
If in Doubt, Seek a Tax Expert
Crypto is notoriously complicated, and taxes can be even more so. Merging the two can be the stuff of nightmares if you’re not careful. If you’re someone who conducts a large number of transactions, it is advisable to call in the experts.
“The IRS has made it [clearer] over recent years what information is required in order to report crypto taxes. However, with potentially thousands of transactions across dozens of crypto wallets, blockchains, and exchanges – it can be time-consuming and messy.”
“Whilst the IRS has taken steps to issue crypto-specific guidance, the pace of innovation has led to tax authorities playing catch up to clarify complex tax treatment. That’s why it’s important to seek advice from a Certified Public Accountant.”