How the IRS Has Been Watching Bitcoin for 7 Years How did it close the net step by step?

Heading into 2021, the IRS simply added questions related to virtual currency to the 2020 version of the tax return, and it was placed right on the first page of the tax form.

How the IRS Has Been Watching Bitcoin for 7 Years How did it close the net step by step?

Read: Going into 2021, the IRS simply added questions related to virtual currency to the 2020 version of the tax return, and it was placed right on the first page of the tax form.

Benjamin Franklin once said that the only things you can’t avoid in life are death and taxes.

Bitcoin, which aims to create an anonymous payment network, is not likely to escape the investigation of the Internal Revenue Service (IRS) either.

On the 20th local time, the U.S. Treasury Department proposed to tighten tax regulation of digital currencies, requiring transactions of $10,000 or more to be reported to the IRS. bitcoin turned down in response, once falling back below $38,500.

In fact, the cryptocurrency world has long been on the radar of the IRS, which defined bitcoin as “property” rather than a currency in 2014, when the market value of the entire cryptocurrency was only $6 billion, and began its journey to taxation.

Zhou Shijian, a senior researcher at Tsinghua University’s Center for China-U.S. Relations, was impressed with the IRS: “Let’s just say to you, what the IRS is looking at, nine times out of ten, it will definitely work.” Speaking to Firstrade, Zhou Shijian said that a very simple explanation of the IRS’s logic in this regard is that after the IRS identifies bitcoin as property, it will definitely be taxed when used (e.g. when trading/paying with bitcoin).

Another senior person who has been following the coin scene in the US for a long time told the first financial reporter to pay close attention to some of the current legal decision trends at the state level in the US. He said that the current decisions in the two cases in San Francisco and Boston are favorable to the IRS’s subsequent behavior, so the Biden administration’s tax proposal this time is not surprising.

Virtual currency transactions over $10,000 need to be reported to the IRS
In a statement, the U.S. Treasury Department said virtual currencies pose a “significant detection problem” by prompting widespread illegal activity such as tax evasion.

The proposal is part of the Biden administration’s plan to close the so-called “tax gap” by strengthening IRS enforcement, and the Biden administration has recently planned to increase investment in the IRS and expand the tax department’s ability to identify wealthy tax avoiders and evaders in order to close the tax gap.

The Biden administration’s proposal also includes a new disclosure requirement for financial institutions to share information with the IRS about the total amount of money flowing into and out of bank accounts, in addition to existing reports.

The U.S. Treasury Department did not specify this time how virtual currency transactions are to be taxed in the future. However, according to existing IRS guidance documents, the level of taxation is inversely proportional to the length of time a trader has held the virtual currency, i.e., the length of time the currency has been held and the amount of taxation.

Specifically, if the virtual currency is held for less than one year, it is taxed as ordinary income. The reason is that such gains are considered short-term capital gains by the IRS, and the tax rate may be as high as 39%; if the holding period is more than one year, it will be taxed as long-term capital gains, and the tax range will be 0% to 20%.

Meanwhile, if a user has been holding cryptocurrency since purchase but has not sold/transferred it, then there is no tax liability, and the IRS explains in the filing that the tax is only triggered when there is a sale/transfer resulting in a potential net profit/loss.

However, the IRS regulations only apply to cryptocurrency traders, and no clear explanatory documents have been issued for futures, forks, etc. The U.S. legislature is also currently calling for the IRS to issue updated tax guidance.

How the IRS is targeting Bitcoin step by step
In the U.S., the IRS is a sometimes more deterrent department than the FBI in the minds of many Americans due to its ability to investigate and deal with tax evasion.

Since 2014, the IRS has been focusing on virtual currencies, including Bitcoin, and has issued guidance document “Notice 2014-21” that clearly states that virtual currencies should be considered “property” and that virtual currencies held by individuals “will not be treated as currency that may generate foreign currency gains or losses for tax purposes.

How the IRS Has Been Watching Bitcoin for 7 Years How did it close the net step by step?

Source: IRS

This means that when individuals use tokens like Bitcoin for transactions such as buying/selling Bitcoins using legal tender, exchanging them in exchange for goods or services to receive them, or buying coffee or laptops with Bitcoin, it will constitute a taxable transaction.

Then, after two years of studying virtual currencies, the IRS struck again: in late 2016, the IRS ordered Coinbase, one of the world’s largest cryptocurrency exchanges, to turn over all customer information in its possession that was involved in buying, selling, sending or receiving more than $20,000 worth of bitcoin between 2013 and January 2015. At that point, almost everyone in the U.S. cryptocurrency community was in danger.

Although Coinbase launched a lawsuit against the IRS on the grounds that the move would compromise user privacy, the lawsuit, however, ended in Coinbase’s defeat. in February 2018, Coinbase said it had informed the IRS of more than 13,000 customers’ Coinbase account information, which included users’ identification codes, names, dates of birth, addresses and transaction records.

In 2018, a credit scoring service called Credit Karma said in a report that “of the 250,000 Americans who have filed federal tax returns in 2018, fewer than 100 reported gains from cryptocurrency investments.”

After winning its lawsuit with Coinbase and gaining access to key user information, the IRS accelerated its massive tax hunt by starting to send warning letters to users of virtual currency transactions in its possession.

During the 2019 tax filing period, a number of people took to social media to post IRS warning letters and ask how much they should actually pay in back taxes. the IRS warning letters are broadly divided into three versions: first, the user is known to hold virtual currency; second, the user is known to have not paid taxes and is likely to start enforcement activities; and third, the user is confirmed to have definitely violated the relevant tax laws and intends to pursue them.

According to the IRS regulations, missed taxes are subject to a late payment penalty, and the unpaid late payment penalty is 0.5% of the monthly unpaid tax amount, capped at 25% of the unpaid tax; also, there is a second penalty for late filing, which begins the month the tax is due and is approximately 5% of the unpaid tax each month.

The first page of the tax return asks for any virtual currency transactions
Entering 2021, according to the first financial reporter to check the IRS tax forms, the IRS simply added a question related to virtual currency in the 2020 version of the tax form (Form 1040), and it was placed on the first page of the tax form. The question reads, “At any time in 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

How the IRS Has Been Watching Bitcoin for 7 Years How did it close the net step by step?

Source: IRS

Knox Wimberly, a U.S. IRS registered agent and Taxaroo CEO, said the more than 13,000 virtual currency traders who received IRS warning letters in 2019 were previously able to explain to the IRS that they “didn’t know they should file” and now face this first-page If taxpayers say they didn’t know they had to file, it’s not going to make sense.

The aforementioned U.S. cryptocurrency veteran told the first financial reporter that, in their view, it was only a matter of time before the IRS joined the regulation.

He said that especially since this year, the IRS has been suing cryptocurrency exchange companies in some district courts, operating in a similar way to the way it sued Coinbase back then, with the aim of obtaining information about customers in the hands of these exchanges and then launching a tax levy on these potential taxpayers, and recently there have been two relatively large lawsuits that the IRS has won.

In April in the Boston area, the IRS won a lawsuit against a payments company called Circle, and in May it won a lawsuit in San Francisco against another cryptocurrency exchange called Kraken.

In both cases, the IRS asked businesses to provide information on customers with account transactions of more than $20,000 from 2016 to mid-2020. Both companies have now said they want to actively cooperate with the government.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-the-irs-has-been-watching-bitcoin-for-7-years-how-did-it-close-the-net-step-by-step/
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