Only last year, the IRS disclosed they had a meeting with four other states in an effort to partner to fight cross-border tax evasion stemming from digital currency users. Last week in the U.S., the IRS released the draft 2020 tax form, with a crypto tax question smack in the middle of the front page.
With COVID-19 stretching budgets thin and witnessing cryptocurrency rising in popularity and valuations, tax agencies around the world are starting to put a significant amount of resources into fighting tax evasion or simple negligence and confusion that stems from cryptocurrency use. Al thismay have a very serious impact on the so-called tax havens (yes, these tax havens can just disappear).
The proof? Only last year, the IRS disclosed they had a meeting with four other nation-states in an effort to partner to fight cross-border tax evasion stemming from digital currency users. The five-country group (Australia, Canada, Netherlands, UK and the U.S.) is called the Joint Chiefs of Global Tax Enforcement or J5. Also, last week in the U.S., the IRS released the draft 2020 tax form, with a crypto tax question smack in the middle of the front page.
The agency included the question last year but placed it on the draft Schedule 1 of the Form 1040, which is where individuals can report other income they wouldn’t put on the main form. And this week, some crypto investors received warning letters from the IRS (dated August 14, 2020) stating they improperly or failed to file their crypto income in their 2019 tax returns. The IRS first started sending out similar warning letters in July 2019 to 10,000 US crypto users.
Tax Havens May Not Last Long
We asked Sovos Solutions principal Wendy Walker to elaborate a bit about these issues.
As we know some countries do not consider cryptocurrencies “a money”, therefore, they don’t tax it. There comes a natural question why would someone stay under the legal binds of the countries that tax cryptocurrencies and not just trade in the countries that don’t?
Walker says that citizens of any given country must abide by the tax laws of their said country. For example, crypto investors trading on Gemini residing in the U.S. are liable to pay taxes and must submit to and calculate their gains using the appropriate 1099 form. If they do not do so, they are subject to audit from the IRS and potential criminal penalties.
However, she notes that we’ve seen ample evidence that tax agencies around the world are cracking down on crypto investors who attempt to avoid paying taxes or, because of murky guidance, fail to appropriately calculate their gains and losses.
This month, Walker mentions, some U.S. crypto investors received warning letters from the IRS (dated August 14, 2020) stating that they may have improperly filed or failed to file their crypto income in their 2019 tax returns. The IRS first started sending out similar warning letters in July 2019 to over 10,000 US crypto investors. Throughout late 2019 and into this year, the IRS has continued to issue legal summons to some U.S. exchanges (e.g., Bitstamp) looking to identify additional taxpayers who have not reported that income.
Speaking about tax havens and other ways to escape from paying taxes that exist now, she said:
“Of course, anyone is free to move assets to a country that does not tax cryptocurrencies. But I expect that those ‘tax havens’ won’t be around for long – the G20 countries are currently developing global tax reporting requirements for crypto businesses which means that crypto investors will not be able to hide assets from their home country of taxation for too much longer.”
G20 to Boost Their Tracking of Crypto Users
Asked about proper taxation of cryptocurrencies, Walker says she is still not sure crypto will be treated differently for tax purposes – “but I think we can expect the G20 countries to bolster their tracking of cryptocurrency users to better capture individuals who attempt to escape paying taxes.”
The Office of Economic and Cooperative Development (OECD) has been researching blockchain technology and cryptocurrency issues specifically for some time now and, this year began developing a global framework for tax reporting amongst member countries. This framework will likely be released later this year and within 2-5 years we can expect that about 200 countries will require exchanges and other businesses to report crypto-related transactions via the Common Reporting Standard (CRS). The CRS is an existing tax reporting regime that Financial Institutions and Insurers are already subject to related to financial services payments.
Form 1099-B for Crypto Transactions
Walker stresses that similarly, in the U.S., the IRS is drafting regulations under IRC 6045 which is generally where the Form 1099-B reporting requirements originate from for financial institutions to report securities and commodities related transactions.
“So bottom line – within the next couple of years exchanges will be required to report Form 1099-B for crypto transactions.”
Walker states that the best thing the IRS and other tax agencies can do is to more clearly explain to crypto investors and exchanges how to report gains and losses.
She says:
“Crypto is a complicated economy – it’s not just gaining $100 by buying and selling Bitcoin. As a virtual currency becomes more mainstream, more goods and services are becoming available for sale via crypto, which constitutes a taxable event under IRS regulations. Other assets, like staking rewards, wallet-to-wallet transfers and hard forks and airdrops are all under the spotlight right now by the IRS.”
Walker also thinks that the biggest changes we can expect are the forms in which investors report their gains and losses to the IRS.
“I believe providing a 1099-K (as some crypto exchanges do) is not an accurate way to report taxable income because it only represents part of the picture for the crypto taxpayer. Rather, crypto businesses need to report that data via a 1099-B so that the cost basis is reflected properly (i.e. If I purchase 0.1 Bitcoin for $500 on Gemini and then send it over to Kraken, Kraken has no way of knowing that the 0.1 Bitcoin that appeared in my Kraken wallet cost me $500 to obtain. Kraken does not know my cost basis.).
This detail allows the crypto investor to correctly calculate gains and losses via Form 8949 and it gives the IRS line of sight into all of the details to substantiate the income and deductions on that taxpayers’ return. This is the transparency that the IRS and the taxpayer need in order to minimize auditing and fines.”
It’s Undue Burden on Investors to Manually Calculate Their Assets
Walker also adds that there are many nuances to the taxation of crypto – and it’s really an undue burden on investors to be expected to manually calculate all of their assets from the year prior. In the traditional financial markets, investors are accustomed to receiving Forms 1099-B and detailed transaction information so that they can properly prepare their income taxes and avoid the hassle of receiving letters, like the ones so many crypto investors received again this month from the IRS.
“While crypto is still the preferred avenue for those looking for alternative investments, it’s popularity has put it under the spotlight of tax agencies around the world. But with that oversight, it’s also the responsibility of these agencies to provide clear-cut guidance on how hodlers report their gains and losses so that governments can begin to accurately capture the much-needed revenue,” concluded she.
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