Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today I will be doing a quick write up regarding a topic I saw and one which is very relevant to all of us. Tax. More importantly, Tax Evasion, and how the IRS plans to deal with it.
The Backstory
Crypto has always had a reputation as a tool for criminal activity, and this year this year the United States Internal Revenue Service (IRS) criminal investigation division has announced it is ramping up it department. With Tax Season ahead they are setting their sights firmly on the crypto community. They are dealing with a much higher portion of crypto tax cases than in the past although have made it very clear they are not just focusing on money laundering crimes. All sorts of cases have been piling up over the previous years, many of which are related to tax, and the department plans on making these cases public soon. The majority of these cases are related to off-ramping (exchanging crypto for fiat currency) and non-reporting of crypto-based pay. Other cases involve individuals receiving payment in cryptocurrency then neglecting to report the income.
A Bloomberg Tax reporter stated:
“In the last three years I’ve really seen a shift, whereas most cases were once related to money laundering, tax cases now amount to about half of the bunch."
Hiring Spree
With the investigative efforts and the level of cases the IRS are looking into, they have decided to hire more than 500 employees to assist in the process. This will include the onboarding of 360 special agents, as well as 150 additional workers over the next year. Previously the agency has been hampered by the closing of the division’s training academy, as well as testing sites, which meant efforts across 2020 and 2021 have been limited. Due to this, the chief of the division, Jim Lee, has said his priority is to increase their headcount over the coming year to ensure they have the resources available to investigate all and every case that comes to light.
Contrary to what most would assume, the department has admitted that crypto-money laundering, while an issue, is still far less impactful than fiat-based laundering right now. In a report released on the 3rd of November 2022, the IRS reported that in 2022 the 2,077 special agents employed by the division were occupied nearly 70% of the time in investigating tax-related crimes such as tax evasion and tax fraud. The other 30% of their time was spent on investigating money laundering and drug trafficking crimes.
Jim Lee has stated they are more than prepared to follow the money and can effectively trace any cryptocurrency transaction. The tools of Blockchain technology make it easier to follow on-chain transaction, but because they are pseudonymous, it’s less straightforward for a government to see who is receiving what funds.
“We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse.”
To account for the increase in crypto related tax evasions, the agency established the Office of Cyber and Forensic Services last year. This was done in an attempt to group the agencies digital asset investigation, cybercrime investigation, digital forensics, and physical forensics support efforts. Lee announced the office was capable of tracing essentially any crypto transaction. According to the report and announcement from Jim Lee, the agency had so far seized around $7 Billion in cryptocurrency in the fiscal year 2022, which is double what it had gotten for the entire of 2021. Within this new new department they have definied "Digital Assets" as cryptocurrencies, stablecoins, and nonfungible tokens (NFTs) all under the one category.
Industry Response
One of the biggest attempts to halt money laundering and access to means for evading taxes was Tornado Cash. The department sanctioned it in August for its use in criminal activity, which unlike previous sanctions, this was the first imposition of trade restrictions ever imposed on open-source software. It was a shock to the community at large when it happened, and while many institution such as Coinbase and Circle have been quick to comply with regulators and their rules, many crypto industry heads have been highly critical of the move.
Binance, one of the worlds most popular and largest Crypto exchanges, has been actively hosting workshops for global regulators. This has been done in an attempt to help them better understand digital assets and their implications. The exchange has even gone as far as hiring a prominent IRS cybercrime investigator to lead its anti-crime unit.
What you can do
Many investors of cryptocurrency would be initially concerned upon hearing the news that investigations are happening. However, it is import to note the correct procedures to take and learn how and what to declare. Although termed cryptocurrency, the IRS considers the digital assets to be property, so it treats any appreciation or depreciation of these assets as capital gains and losses.
To ensure there is no taxes due to be paid one simply has to adhere to the maxim of HODL. Holding on for dear life is basically buying an asset such as Bitcoin, which in itself does not incur any taxable event. Those who have bought crypto but have yet to sell do not have to pay taxes on their holdings. The taxable event only happens once an investor sells or trades some or all of their assets in a way which is recognized as a gain. The tax rate on the gain will depend on whether investors held the asset for over or under a year.
Similarly an investor can report a loss on an investment which can be used to offset other gains of up to $3,000. This of course only comes into play assuming the total loses are greater than the total gains. As many investors have suffered during the crypto winter of late and some have been forced to sell, this could be a valuable piece of information to remember.
I hope you enjoyed the article and remember it is important to file your taxes in a prompt and timely manner. The IRS will find a way to track you down unfortunately, so better to work with than against them.
Have a great day.
Peace. CryptoGod-1.
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