IRS Puts Cryptocurrency in the Crosshairs with Inflation Reduction Act
If the US government wanted to lab-engineer a strategy to hinder the adoption of cryptocurrency by ordinary people, one method they’d come up with is found in the Biden administration’s “Inflation Reduction Act.”
It allocates $80 billion in new funding for the IRS to hire 87,000 new agents to go on an audit-spree of Americans at all income levels, coupled with changes on reporting cryptocurrency transactions that are designed to trip up taxpayers and trigger audits.
Tax attorney Robert Wood breaks down some of the red flags at Cointelegraph.
In other words, American taxpayers at every income level are fair game regardless of income. So buckle up, and think about whether your taxes — and records — are vulnerable. How would they look under a microscope? Tax returns must be signed under penalties of perjury. What’s more, if you try to change that language, the IRS says it doesn’t count as a tax return — which means your statute of limitations on an audit never begins. You can be audited forever.
Speaking of perjury, the IRS asks on every individual tax return, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
The 2022 version of that question is even more intrusive as we’ll see. The IRS says that all taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either “Yes” or “No” to the virtual currency question. The question must be answered by all taxpayers, not just those who engaged in a virtual currency transaction in 2021.
Just answering yes or no isn’t hard, but one thing it’s meant to do is tip you off that you have a taxable event, which usually means paying some tax. So you also have to report the gain or income. As if the crypto community wasn’t nervous enough, get ready for more since the tax stakes are going up again. For 2022 tax returns, the IRS has modified the crypto question asked on IRS Form 1040, the tax form used for individuals. A draft of the 2022 IRS Form 1040 asks:
“At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
That casts the net wider than did the prior version. The IRS gift and estate tax people are generally distinct from IRS income tax personnel. But the expansion of the crypto tax question may herald more to come, more crypto audits, more IRS scrutiny on crypto and crypto taxpayers and more money being poured into IRS compliance generally. The so-called Inflation Reduction Act is supposed to fund the hiring of 87,000 new IRS agents and add nearly $79 billion to the IRS, a vast $45 billion of which is being directed solely into IRS “enforcement.”
The US Treasury and the Fed really don’t like DeFi and how it allows people to have private, anonymous transactions. The move to create multiple vague audit tripwires is clearly designed to make crypto advocates less active and to make crypto newbies think twice about adopting cryptocurrency at all.