The Internal Revenue Service (IRS) is embarking on an exercise to ensure that crypto investors pay their fair share of taxes from crypto gains.
The crackdown is also part of a collective effort by US lawmakers, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) to strengthen their oversight of crypto trading.
As the cryptocurrency industry grows and investors profit from it, the government is seeking to collect taxes from the income generated.
However, the effort has not yielded much result, hence the renewed effort by the IRS to ensure maximum compliance.
IRS Cracks Down on Crypto Tax Evaders
To ensure that cryptocurrency investors pay taxes commensurate to their investments, the IRS is requesting information on crypto investors from crypto investment platforms like Coinbase as part of a crackdown operation on crypto tax evaders.
In August 2022, the IRS sought information on customer information from SFOX Inc., a cryptocurrency dealer.
Bloomberg reports that the regulator requested a court in New York to summon SFOX and its partner M.Y. Safra Bank with the goal of acquiring account and transaction records for users with cryptocurrency transactions over $20,000 in any year from 2016 to 2021.
The court has served a similar summon seeking user information from top US crypto exchanges Kraken and Coinbase, as well as Circle Internet Financial.
Why the IRS Is Cracking Down on Tax Evaders
As per Bloomberg, Multinational bank Barclays PLC released a report in May 2022 indicating that crypto investors aren't meeting up to half of their crypto tax obligations. This could have served as a wake-up call to the IRS to follow up more closely on crypto investors.
The government says SFOX alone has over 175,000 users who have made $12 billion in transactions since 2015.
The figure is small compared to the number of users and their transaction volume on big crypto trading platforms such as Kraken and Coinbase, which are among the best crypto exchanges in the US.
A major hindrance to the effective collection of crypto tax is the privacy of crypto transactions. This makes it difficult or even impossible to trace cryptocurrency transactions and obtain information such as the user, the cryptocurrency used, and the transfer amount unless the investment platform or crypto exchange reveals such information.
The IRS must now seek court orders to compel such platforms to reveal the transaction details of their customers to enable the IRS to carry out its duties effectively.
What This Means for Crypto Investors
One of the most celebrated features of cryptocurrencies is the ability to use them for transactions without anyone knowing who is behind the transaction. However, the government doesn't like this as it means they cannot extract taxes on transactions and investments.
Furthermore, the US does not have a clear regulatory framework for the cryptocurrency industry, a big chunk of which resides in the country. As the government is interested in tracking crypto gains, their continuing resolve to make sure crypto investors account for their income seems to be yielding fruits.
This is as courts now order crypto investment and trading platforms to provide user information for the sole purpose of enforcing tax remittance.
The IRS has provided tools that investors can use for easy voluntary tax filing, but apparently, this isn't working. Consequently, going forward, crypto investors will be compelled to pay the correct taxes as the government explores ways of getting around the privacy of crypto transactions.
The IRS Is Determined to Collect Crypto Taxes
From the steps taken by the IRS, it is clear that the agency is determined to succeed at forcing crypto investors to pay taxes correctly.
For most investors, this may be a big shock as they have enjoyed earning from the industry for years without having to pay tax or at least pay less than is expected of them.