Learn about IRS history with crypto in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.
We will talk about where the current state of cryptocurrency reporting is for taxes and break down the IRS history with crypto.
In the full live webinar, we covered:
- How to deal with COVID 19: Paying Crypto Taxes On An Installment Plan
- The current on-going policies regarding crypto-taxation
- What are taxable events and how to handle them
- The sent IRS letters and the different implications for each of them
- The next steps in order to conduct your crypto tax submission
- Some opinions from a top Crypto CPA in the market and average estimate of how much you will be paying in taxes
- An idea on how to estimate your taxes with a crypto tax tool
PART ONE: IRS History With Crypto
In Part One, we’re going to discuss the tax guidance the IRS has created to report cryptocurrencies and breakdown what those activities have been in the IRS history with crypto.
We will look at what type of enforcement the IRS is doing and review how they’re slowly increasing the level of implementation in how they’re going after people. We’ll also explore some IRS letters that they sent out.
About The Presenter
I’ll tell you a bit about myself. My name is Clinton Donnelly. I’m an enrolled agent, but I have an advanced law degree specializing in international financial regulation and taxation. I specialized in foreign reporting and crypto reporting for many years.
I have some of the largest clients out there, with tens of millions in crypto investments, complex reporting obligations, and anti-money laundering reporting needs.
And at this point, we’ve helped people reduce their capital gains by over $40 million using like-kind exchange calculations for pre-2018 gains.
Donnelly Tax Law has done over 850 anti-money laundering forms for crypto traders.
We’ve also done over a thousand tax amnesty filings to help people avoid penalties for failing to do previous filings with a 100% success rate. We’re very proud of that.
More importantly, my firm not only prepares tax returns, but we have also created a whole slew of do-it-yourself tools and books, and we now have video courses coming out to help the average person do their taxes and save a lot of money.
We are one of the few firms that have genuinely defended a crypto investor in a formal IRS audit of their crypto investments. Our background creates some unique insights in terms of what the IRS is doing and how they’re looking at things.
So I hope to share this with you and that you’ll find it helpful.
About Accointing
Accointing is a tax software package for helping you calculate your income and capital gains. It is tremendously easy to use. It does use APIs and CSV files from crypto exchanges and works with all of the major exchanges.
It’s an exciting tool found at Accointing.com. It has a lot of free features, and it supports over 300 wallets and exchanges. So it’s fully functioning and very affordable. I think it has a powerful reconciliation tool to help you get onboarded and get your transactions loaded, so you can start getting your tax results right away.
What’s the IRS history with crypto so far?
IRS Issued Initial Guidance In April 2014
The IRS has issued initial guidance in 2014 about cryptocurrency reporting of a tax sale. The IRS came out with what they called a notice that defined “what they referred to as virtual currency.” It’s cryptocurrency.
In this notice, the IRS stated cryptocurrencies are to be treated as property.
We’re going to dig into what their guidance means regarding property.
It’s not called currency; the IRS called it virtual currency. When, in fact, the IRS doesn’t treat it like that.
The IRS Commissioner Made A Statement In February 2018
In February 2018, the IRS commissioner, Charles Retting said that the IRS has, and will continue to have more information about you than you could ever possibly imagine, referring to crypto traders. So they’re working very hard at capturing a lot of data about traders and what their activities are.
The Next Update Was In March 2018
So the next update was in March 2018, Coinbase had been sued and lost in court. They were being sued by the IRS to turn over information about their account holders of cryptocurrencies.
In 2014, 2015, and 2016 tax years, only 900 people had reported cryptocurrencies when Coinbase had a customer base of six million. Most of them were Americans.
At that time, they lost in court and had the turnover, some accounting, account information.
That was the first access to some information the IRS formally got regarding whom the crypto traders are in the US.
This is the big IRS challenge, to identify who the crypto traders are.
IRS Guidance Released In October 2019
In October 2019. The IRS came out with some guidance about how cryptocurrencies should be reported.
These are FAQs. If you go onto the IRS website, IRS FAQ, virtual currency, you will see the guidance.
It’s a very easy to read explanation about how to treat the tax reporting. However, on some very critical issues, the guidance is a little confusing.
So, they also came out with a revenue ruling, which was widely criticized, not only in the accounting space but also in the crypto media and Congress.
The IRS went on to do a presentation at the American Institute of CPA’s, their national convention, which had several faux pas.
It became grossly evident that the IRS was not listening or understanding the cryptocurrency marketplace.
The IRS was doing a poor job of getting this advice and guidance to meet the taxpayers’ needs.
March 2020 Crypto Conference With IRS
The IRS had a conference of crypto corporations in March of this year with all walks of the crypto chasm.
It was a listening session for the IRS to hear what the significant movers and shakers had to say about crypto taxation. And that’s where we are from a guidance point of view.
There’s not as much guidance as we would like, but there’s adequate guidance for us for the average taxpayer to provide a complete tax return.
What does the IRS history with crypto letters mean?
One of the forms of guidance that the IRS sent out were some letters.
Let’s look at it in terms of how the IRS did their enforcement.
We’re going to talk about enforcement and how the IRS is going after people either not reporting or reporting incorrectly.
The IRS has what they call a compliance campaign, which is the primary way of organizing their activities to go after a specific focus.
They have a cryptocurrency or virtual currency guidance campaign.
July 2019 The IRS Issued About 10,000 Letters
In July and August of last year, 2019, the IRS issued about 10,000 letters to suspected crypto traders. The slide above is showing us that there were three different types of letters.
There are two types: Letter 6174 and Letter 6174A, which is a little longer. These were benign letters to someone saying: you might want to think about how you reported your cryptos. The letters asked, did you report all of it correctly along with some thoughts about how reporting should be done.
The third Letter 6173 was sent to people whom the IRS thought had engaged in criminal activity. So if you got Letter 6173, it’s because you’re on a list of people the IRS believes to have an illegal issue.
Several clients contacted me with Letters 6174 and 6174A, which told me a lot about the IRS.
From a public viewpoint, we all knew that the IRS had some Coinbase data from 2013, 2014, 2015, and 2016. And it turns out that some clients that I worked with who received these letters never dealt with Coinbase.
So, the IRS found out about them apart from that court case.
I talked to about two dozen clients who received these IRS letters; almost all had at least $900,000 in Bitcoin at the peak in 2017. That tells me that the IRS had done some significant data mining activity, putting together the pieces. And they have a pretty good idea who the crypto traders are in the US.
The fear of a political backlash, particularly from Congress, is what has restricted the IRS from going after all the taxpayers full force. Because when Congress gets angry, particularly the House of Representatives, they cut the IRS funding.
There’s a real balance here between the IRS and how aggressively they’re going after taxpayers.
It is my perception that the IRS has mainly focused their efforts on criminal activities: Silk Road types of things, organized crime using cryptocurrencies to launder money in the proceeds of their efforts, this has been mostly what we hear about.
What is the current situation regarding the IRS history with crypto?
Several Crypto Traders Received Audits Beginning March 2020
In March 2020, several crypto traders started receiving audits from the IRS. These are formal IRS audits of their tax returns for 2017. The IRS uses the same questions in both examinations.
I have two copies of the letters. One is my clients, and the other one is from another preparers’ clients. The wording is all the same on both letters.
Based on these letters, we got a good idea of how the IRS looks at that question during the “gathering portion” of an audit.
IRS Looked For Consultants In May 2020
Just last month, we found out that the IRS was issuing an RFP (Request For Proposal) to crypto gain calculation services to find services that would act as consultants and do analysis during audits and trial proceeds.
So the IRS is looking to line up the type of talent they need to go after non-criminal crypto traders, these would be people who have failed to report their cryptos.
Is it tax evasion? Perhaps.
It is, however, considered neglect.
Many people in 2017 made a lot of money and didn’t report it because they didn’t know how back then. But, they’ve had enough time to correct that oversight since 2017.
I just had a client who wanted to fix it. He had never reported in 2017 and wanted to fix that. The IRS has started to hone in on the average investor, and I expect to see a much stronger crackdown continuing.
The IRS issued guidance in the form of a question added to Schedule 1 of your tax return.
Schedule 1 is where taxpayers list income from different sources, and Schedule 1 asks, did you receive sell, send an exchange, or have any financial interest in virtual currencies? This is a yes or no question. Every taxpayer is requested to answer it. But, failure to answer this question exposes taxpayers to liability.
Now, this is fundamentally a perjury trap, because when you sign your tax return, and you may never have read the fine print, you may have never actually looked at the form. But what it says, and I quote, “under penalty of perjury, I have read my return and attached statements and schedules, and it is complete, true and correct to the best of my knowledge.”
So you are swearing that it is complete and it is correct. Meaning that with this question, you’re saying with a yes, or no, I have had cryptocurrencies or have not, and the penalty if you’ve lied is perjury.
My advice is that everybody should answer yes to Schedule 1. Many fear the IRS will come after them because they are trying to develop a database. But what we've seen is the IRS will use this question later to come after somebody.
There’s a similar question on schedule B part three: “Did you have a foreign bank or brokerage account or other financial accounts?” And it was also a yes or no. And the IRS used this in prosecutions after they’ve identified someone they wanted to go after.
So that general fear that people have that, answering yes will prompt the IRS to come after them, is not well-founded. The IRS does not have that much workforce to go after people like that. But I ask that people should all answer yes to this question.
The way that the IRS has defined virtual currency in their notice of 2014-21, says that "any store of value is a virtual currency." And under that definition, basic frequent flyer, miles are a store of value because you can use it to buy the essential things.
Also, if you have a credit card that racks up points that you could buy stuff off the credit card, that too is a store of value. So rather than people being afraid of answering this question in hiding, by saying, no, I think you should check, yes.
You should get your mother to check yes on her form and your aunts. You should get everybody to check yes. In that manner, you dilute the value of this question in total. It’s all about honesty in the answering of that question. That’s my feedback.
The IRS is lining things up, as they need, in order to prosecute everyone. They have argued that they’ve given everybody enough time.
In the RFP (Request For Proposal) the IRS sent out to crypto companies requesting consulting work, they specifically use the example of failure to report in 2017.
The IRS is focused on the people who made a lot of money in 2017, regardless of what happens this current year with crypto gains.
Stay Tuned For Part Two of The Crypto Tax Webinar
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