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Intro: President Joe Biden’s government is trying to control cryptocurrency transactions in his hands. The administration has introduced a slew of measures to be taken so that there is no tax evader in the country, especially dealing in the crypto market.
Crypto enthusiasts can be found anywhere in the world. But have you ever thought among them how many pay taxes on their crypto earning? Well, the count must be negative. For years, the cryptocurrency holdings for the U.S. taxpayers have existed in a gray zone. However, with the passage of time, those crypto wallets are getting full attention from the Internal Revenue Service (IRS) and the President Joe Biden’s administration.
The President’s administration is keen to crack down on the tax cheats which the government has been facing for quite a long time. And the decision taken by the government is matching perfectly with the timing, when the President needs to raise money for his ambitious economic agenda.
The tax gap which the country has been facing for a long time is going to end soon. The difference between the tax paid and tax owed is very big and it is the time to ripe the benefits of this difference by the U.S. government. Charles Retting, IRS Chief believes that the country is losing about a trillion dollars every year in unpaid taxes and this growing gap is due to the rise of the crypto market.
Now that the Federal Government is convinced about this theory of Tax Gap, the White House has given the Internal Revenue Service all the necessary powers and $80 billion to combat tax evaders and those who deposit money in cryptocurrencies.
The sanctions towards Tax- initial phase
In the U.S. it is easy to do crypto tax fraud unintentionally. In 2019, IRS has asked the crypto investors whether they had paid taxes for the crypto earnings. There was a question raised in the form Schedule 1, which read that in 2019 if at any time did you receive, sell, send, exchange or obtain financial shares in virtual currency should be mentioned in the form.
However, according to experts, the subject mentioned in Appendix 1 is ambiguous and not everyone has submitted this document. Schedule 1 was used to report the income not listed on form 1040 like capital gains, alimony and gambling winnings.
Later, in 2020 IRS has moved the virtual currency question to the form 1040, which is used by everyone to fill in the income tax return yearly. But there was one issue in filing the income earned from crypto as there was no clue on how to calculate the crypto capital gains and losses.
If the crypto user trades via brokerage, a 1099-B form is given to fill up the transaction proceeds, streamlining the reporting process. Few crypto exchanges started giving the tax form 1099-K, to the individual who does at least 200 transactions worth $20,000 or more. The individual can file the total amount of transactions.
Virtual currency as property
Digital assets are treated as property in the eyes of the IRS. This means the individual had to pay a tax in a manner similar to stocks or real estate. For example, if one bitcoin is purchased at a rate of $10,000 and further sold at the rate of $50,000, then $40,000 is the capital gain which is taxable.
However, this is little unclear on what constitutes a taxable income. Buying a Dogecoin with bitcoin taxable? Purchasing a TV with Dogecoin taxable? Buying NFTs with ether? The answer to this question is still not open. Technically, they are all taxable.
IRS crackdown on Crypto
It is a known fact that crypto trading has seen a slump in the last few weeks. But the overall market value of virtual currencies is still at 75% in 2021. Hence, the IRS wants to put new rules in action so that a decent amount of crypto tax be collected. The IRS has managed to ramp up subpoena centralized crypto exchanges for information about the people who do not pay crypto taxes.
The IRS has been given the orders by the court to summon big exchanges like Kraken and Circle to find out the individuals who conducted more than $20,000 of transactions in crypto from 2016 to 2020.
The movement that has been pushed now, it is clear that the taxpayers should take the letter issued by IRS and start reviewing your tax returns very seriously, and if necessary, modify previous returns and pay taxes, interest, and penalties. After getting the letter by the IRS, individuals are given 30 days notice to respond. Else, their tax profiles are examined by the authorities.
People are now looking to consult the counsel to know whether they should go ahead with potential audits and be very proactive on giving past returns. IRS is also using new data analytical tools and technology to uncover the crypto tax evaders.
New rules by President’s administration
The new rules set out by the Biden’s administration is a favour for the U.S. economy. The Treasury department has released a new greenbook where more comprehensive reporting requirements for crypto are to be mentioned. So now it has become difficult to spend virtual currency without getting noticed.
As per the new rule, businesses have to report to the IRS about all the crypto transactions which are more than $10,000. Exchanges and custodians have to report on the data of the user’s accounts which conduct at least $600 worth of gross inflows or outflows in a year.
The administration of Biden has also proposed to raise the tax rate on Long-term capital gains from the present 23.8% to 43.4% jump. This is quite a high jump which has given a blow to the taxpayers.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
