Crypto Tax Tool With A Crypto Tax Expert – The Crypto Tax Webinar: Part Three

Learn how to estimate your taxes with an excellent crypto tax tool and tips on how to estimate how much you will be paying in taxes.

Learn about how to estimate your taxes with an excellent crypto tax tool called Accointing in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.

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

In Part One, we discussed the tax guidance the IRS has created to report cryptocurrencies and breakdown what those IRS activities have been in the history with crypto. 

We looked at what type of enforcement the IRS is doing and reviewed how they’re slowly increasing the implementation level in how they’re going after people. We also explored some IRS letters that they sent out. 

In Part Two, we discussed how to report cryptocurrencies on your crypto tax return. We looked at the mechanics and tax aspects of that.

PART THREE: Crypto Tax Tool With A Crypto Tax Expert

In Part Three, we will discuss how to prepare a tax return and what sort of help you can get. We’re also going to discuss how to use Accointing, an excellent crypto tax tool.

Accointing is a beneficial tool, particularly for reconciliation, one of the biggest challenges when using a tool.

You can report internal transactions using the crypto tax tool Accointing. These are transactions within the actual platform. 

You need to tell the platform that those transactions were transactions recognized as being equal and the movement from one point to another. Then you can classify transfers within Accointing. 

The idea here is that you can state what should be classified as income, an airdrop, a margin fee, a margin loss, and so forth to classify them based on their depot.

What happens if I don’t disclose all my positions?

crypto tax tool

Now we’re on the slide about what happens if I don’t disclose all my positions. This slide is a bit of a misnomer. 

You don’t disclose your positions to the IRS, only your transactions and the penalties listed here are really for criminal tax evasion. 

What do you have to worry about if you didn’t report your crypto activities in 2017?

The IRS is going to spend their time going after the big fish. They've demonstrated the ability to determine who the big fish are with 10,000 letters.

If you're what I'd call a small fish and you had less than a hundred thousand in 2017, you may not be the type of person the IRS will focus on.

I mentioned that because many of the smallest traders that call me are super conscientious and want to report everything and be above board.

The IRS is going to focus on the most prominent players: large and middle-sized players.

What happens if the IRS identifies that you didn’t report some income in 2017, and then you reported some gains, and they hit you with penalties?

There could be an understatement of taxes, that’s a penalty, and a late payment because you didn’t pay this. 

Those two penalties themselves would typically add 50% to whatever you owed. 

If it were over $5,000 in taxes, you would be looking at another 50% more in terms of penalties and interest. 

If they felt you had engaged in tax evasion, there is a civil tax evasion penalty of 75% of whatever taxes weren’t paid.

Generally, they’re only going to use that when they’re coming after someone who is pretty egregious. 

The critical thing is you want to be clean because when you suddenly start reporting in 2020 that you made trades, and when you list the buy date as 2017, that is a logical jump for an auditor to ask, ‘why didn’t you report any cryptos in 2017 or 2018?’. 

You bought some, and you probably traded some. 

So it’s the dates that are going to force you to come clean on past filing issues. That should be a concern of yours. You can schedule a consultation with me and we can talk through the situation.

What method can I use for crypto tax calculation in the US?

crypto tax tool

This question is related to the words FIFO and LIFO (first-in-first-out) or (last-in-first-out). 

Read More: Tax Expert: Picking The Best Method For Reporting Your Cryptocurrency Gains

These reporting methods determine which coin it is that you sold when you sell a coin. 

We know the price when we sell a coin because that’s in the transaction records, but what was the price of that coin?

You may have had coins at five different price points, and which one was it that sold? 

The one you choose determines how much gain or loss occurred on a particular transaction, and that affects your taxes. 

The tax laws said, FIFO. 

They currently refer to revenue section 1012 which says, you have to do FIFO. 

However, the IRS in the most recent FAQ in October 2019 said, you can use any method you want. 

You can choose the best reporting method after the coin has sold as long as you use what they called a specific identification approach, which is being able to show that all your coins are accounted for. You just can’t make it up. Accointing’s crypto tax tool does that. 

Accointing allows you to use FIFO, LIFO, or any method that you’d like. 

I recommend that people use whatever method generates the lowest taxes for you to pay that year. And you can change this method every single year. You might do LIFO one year FIFO another year, and then, maybe an optimized method a third year.

How do you get started with an excellent crypto tax tool?

crypto tax tool

You have to decide how much you’re going to do for yourself on your taxes and how much you want someone to help you. 

Our company does full-service tax calculation, but you’re going to be paying a couple of thousands of dollars to do all that per year. Larger traders can afford that, but smaller traders have to do that in a bit more of a budget manner. 

I recommend a crypto tax tool like Accointing to generate your crypto tax records. That’ll generate a form called form 8949, the IRS form where you list the buy and sell dates and the cost and sale prices. Everyone is on the list, meaning the gain for every transaction.

Accointing will generate that record, and they can create it in a TurboTax format. 

If you use TurboTax, it can be automatically uploaded, and Accointing makes it very convenient. 

Most of those software packages will lease with TurboTax, but Tax Act or H & R Block will be the largest one. They all have the tools to generate a tax return. However, they aren’t literate about cryptocurrency reporting. 

You’ll find instructions on the Accointing web page, which tells you exactly how to load it into TurboTax. It’s straightforward and effortless to do with the instructions. You only have to upload it to the software. So that’d be one approach.

What if your tax life is complicated or you are using an accountant, but your accountant doesn't know cryptos?

Your accountant is not interested in learning cryptos, so it may fall on you to use a crypto tax tool like Accointing to generate the tax records that you then turn over to your accountant. 

And your accountant will then know what to do with form 8949. He or she can plug it into the tax software.  

Or you can go to a full-service firm that can do everything for you if doing your crypto calculations is too overwhelming.

How do you find the right crypto tax accountant?

The best thing is to ask your accountant, bluntly, “Do you do cryptocurrency tax returns?” Ask them, “How many have you done and do you calculate the capital gains, or do you expect me to do that?” 

I had one client who, in 2018, had a CPA who said, “Yeah, I know how to do this.”

And that CPA was only learning how to do crypto returns. 

My client gave this CPA her taxes and five months later she still didn’t have it done. She gave up on it. So, she took it to another CPA who said, “Yeah, yeah, yeah, I can do this”. 

He prepared the entire tax return for her, but he didn’t sign it. And my client dug into it and found out that this guy had lost his CPA license. 

So it was just a fake return that he had made. 

My client met me, and we did her tax return after the others failed. We got the whole thing solved and saved her a fortune. She paid zero taxes that year. 

You want to ask your tax preparer, how many crypto tax returns they’ve done. You don’t want them to learn on you.

You can tell your tax preparer that you’ll do the Accointing work yourself and bring it to them. Your tax preparer will say yes to that and know what to do with the Accointing results.

Suppose you cannot do the calculation yourself, and using Accointing is overwhelming for you. Then, you need to get a professional to help, which can be done on an hourly basis. 

Or you can turn the entire work over for a higher amount and have someone do the whole thing. 

That is how you get started and get a tax return prepared.

How much will it cost me to pay my crypto taxes?

crypto tax tool

The complexity of your trading environment will have a bearing on how much you pay when you use a tool like Accointing. 

Some people like to dabble in everything and used a bit of everything. Say, they did shape shifting, margin trading, and futures. They also used Binance, Defi, and did all sorts of things. 

The more complicated your environment was, the more complicated it can be to calculate your gains. So, you have to look at the crypto tax tool and see what their pricing is.

Power Tricks For Medium To Large Fish (Crypto Whales)

I have a handful of tricks for you. 

Suppose you’re a medium and large fish. 

Note: These tricks probably aren’t for smaller fish.   

My big six tools would be for reporting your capital gains before 2018, when the law was changed. We could use a method called like-kind exchange for 2015, 2016, and particularly 2017. This is a way of not having to pay taxes on the crypto to crypto trades. That gain is passed along to the subsequent transactions. 

Starting in 2018, you couldn’t do like-kind exchange anymore, but I’ve saved people millions in this area. 

For tax harvesting, as we come into the end of the year, around October, November, you want to start thinking about how you are poised from a capital gains point of view.

Around October/November would be a great time if you have a lot of gains to do tax harvesting, this would be to take coins that are losers, and sell them for a loss and take that loss and it offsets your gain so that your taxes at the end of the year will be lower. 

There are two methods of tax harvesting:

  • One is just selling worthless coins. 
  • Another one is doing a wash where you take a coin, sell it to lock in the loss, and then the next day buy it right back because you still want to have a position for that coin. You have a long term expectation for it.

If you’re a large fish, the third idea is to move to Puerto Rico, but you genuinely have to move there. You can’t just visit. They offer a 0% capital gains tax on capital gains from cryptocurrencies.

There are a lot of complexities and a severe thing to do. You seriously have to move to Puerto Rico. You have to uproot your life, but if you’re a large fish, this might be a meaningful thing to do, to make a lot of money to reduce your taxes. 

So what are we talking about here? 

You’re going from 15% tax bracket down to a 0% tax bracket. 

So if you had $100,000 in gains, you’re looking at $15,000 in taxes. 

To save $15,000 and go to Puerto Rico, probably not the right move for you, but if you have millions, this would be something to consider. 

If you have old returns between 2017 and 2018 and you need to fix them because you didn’t report anything, especially if you’re a medium and large fish. Then you would need to look at tax amnesty solutions to minimize your tax liability.

What is your anti-money laundering liability?

If you traded on foreign exchanges, you had over $10,000 in foreign exchanges, you become liable to report those on the two anti-money laundering forms, FBAR and form 8938. 

You can bulletproof your tax return. Just go to my website. 

We have lots of do-it-yourself tools like books and an increasing number of videos we’re starting to make available online on how you can calculate your taxes using TurboTax, and how to do your anti-money laundering form filings. 

We have lots of great crypto tax tools.

Responding To IRS Communications

crypto tax tool

Donnelly Tax Law offers a crypto tax audit for an annual fee. 

Suppose the IRS contacts you about your crypto activity on your tax return. For any tax return you have exposed, and if you get contacted by the IRS, we will provide you with an analysis. You’ll be getting your A-team in place to respond to that crypto tax return.

This audit assist is critical. You can go to CryptoTaxAudit.com to learn more about that.

Dealing With COVID-19 Installment Payments

crypto tax tool

A lot of people are concerned about paying taxes. They realize if they pay their taxes, it’s going to be a big tax bill, and they might not have the money. People are worried about that. 

One of the things you have available to you is installment agreements from the IRS. People who owe a lot of money can set up an installment agreement and spread the payments out over seven years.

You can pay it month by month until your cryptos go up and start to make some money, and then pay off that tax debt in a lump sum. The IRS is excellent about lump sums. They’re remarkable about interest rates, but they do want you to pay them monthly.

If you’re concerned about that big tax bill and what you’re going to do about it, there are many ways to do it. 

See the chart above that explains some things, and if you have concerns, contact us.

Utilizing A Good Crypto Tax Tool

I invite you to go to the Accointing.com website and try their crypto tax tool. Dabble with it. There are several free features you can use. 

If you require professional advice, you can contact us. 

We have clients all over the world doing crypto calculations for US clients. 

You can schedule a consultation on our website. 

We can talk about your particular situation, or if you need help preparing your tax return.

Thank you for your time, and I hope you have a great weekend.

If you have a more complex situation, you can talk to the people at Accointing on their chat web page.

You can also contact me on my web page DonnellyTaxLaw.com and schedule a consultation for a fee; we can go over whatever your particular situation is.

You can also visit our website for Do-it-Yourself resources for doing your taxes.

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How to Report Cryptocurrencies – The Crypto Tax Webinar: Part Two

Learn about the mechanics of how to report cryptocurrencies on your tax return and the help you can get to prepare your crypto tax return.

Learn about how to report cryptocurrencies and prepare your crypto tax return in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.

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

    In Part One, IRS History With Crypto, we discussed the tax guidance the IRS has created to report cryptocurrencies and breakdown what those IRS activities have been in the history with crypto. 

We also looked at what type of enforcement the IRS is doing and reviewed how they’re slowly increasing the implementation level in how they’re going after people. We also explored some IRS letters that they sent out.

PART TWO: How to Report Cryptocurrencies

crypto tax lessons

In Part Two, we are going to discuss how to report cryptocurrencies on your crypto tax return. We’ll look at the mechanics and tax aspects of that.

When to report cryptocurrencies as a taxable event?

Cryptocurrencies are treated as property. 

You only make income from property when you sell it. So buying cryptocurrencies is not a taxable event.

A taxable event is something that has to be reported on your income tax return. 

You can buy cryptos all day long, and you don’t have to report them. 

However, when you sell one, you have made a profit because you will hopefully sell it for a gain. That gain is what you have to report on your tax return.

I want to address a critical point that many people don’t understand who are new to taxes, called capital gains.

When you trade one crypto for another crypto or have a crypto-to-crypto trade, is that a taxable event?

It’s taxable for the crypto that you gave up because you have already achieved some gain or loss for that crypto. 

You have to report that even though you didn’t take or receive US dollars from the transaction.

From a tax law point of view, you’ve made a gain when It moves from this coin to that coin. 

Every transaction has to be reported on Form 8949. And that’s what services like Accointing do exceptionally well. 

You plug in all your transaction records from your exchanges and wallets. 

Accointing’s tool will go through and match it up and generate the forms you need to do a tax return. It can create the reports and forms that you need to give to an accountant to prepare or to do it yourself with TurboTax or Tax Act.

So if you decide to pay somebody, $2,000 in Bitcoin, because they’re going to do some service for you, is that a taxable event?

When you sell Bitcoin, You give up ownership of it. The value of that Bitcoin is going to be $2000 because that’s what you agreed to in this scenario. That is equivalent to a sale event or an exchange, and giving up that Bitcoin would be a taxable event.

The person who received that Bitcoin sale, got income. So on their tax return, they have to report that they received income.

Suppose you’re someone who got paid in crypto for doing work or selling a product that is income. These are reported like a wage or on your business income statement. 

I want to hit that home: Every trade crypto-to-crypto is a taxable event. This concept is essential. Many new traders don’t realize that a gain can be a positive gain or a negative gain. 

We call negative gains losses, but they’re all important. 

Even though you had some gains, if you have other ones that are losses, you can use those losses to offset your gains, and you only pay tax on the net. Gain the winners, minus the losers. 

You pay a tax on the collective gain, if it’s a positive number.

I’ve had so many people who bought Alt coins in 2017, and the prices went down, down, down, and became worthless.

I’ve had to tell clients that all those worthless coins they bought are hidden gems. 

You can claim those as tax losses, and because they are worthless you can offset the gains that you’ve made, and you’d save a bundle of money on your taxes. 

I want to stress the importance of both of those. 

When you buy crypto with Fiat, the first time is not a taxable event, but when you get the crypto back and get a fee outback from selling crypto, that is a taxable event.

How To Compute Your Crypto Taxes In The US To Report Cryptocurrencies

report cryptocurrencies

We use the word basis, or you might’ve heard of a cost-basis; both words mean the same thing. 

The basis is the cost. It’s the collective cost that you’ve had in owning something before you sell it. The price you bought it for, that’s your cost basis. And when you sell it, that’s your list of use and equivalent to the word proceeds. 

The proceeds of a sale are whether you sold it for cash or whether you sold it in any swap for some other coins. 

You subtract those proceeds and you get the gain even if it’s a negative amount. Proceeds are always expressed in US dollars.

Taking Advantage Of Long-Term Capital Gains To Save Money

I’m going to tell you about one of the most significant ways to save money on your crypto taxes: by taking advantage of long-term capital gains. 

When you sell a coin in a unit treated as regular income, the gain is taxed like a regular income (like a dollar of salary), and you pay taxes on it. 

But if you have held that coin for more than a year, you get a lower tax rate; it’s called the long-term capital gains rate. 

For most people, that’s 15% versus your regular tax rate, your tax bracket. The marginal tax bracket of most people is in the 20% to 30% range. So, long term capital gains is a great way to reduce your taxes.

Another thing is the transaction fees, especially if you’re a high-frequency trader, your transaction fees are quite significant compared to your total gains. So, you can claim those transaction fees. They’re part of the cost basis for your trades. You need to use a tool that captures the transaction costs as well as the trade values. I will mention Accointing for this, but most of them will do this for you.

Next, we’ll talk about the holding period. It lays out the principle of a long-term versus the short-term capital gains. The IRS fully approves this. Congress likes long-term capital gains and is encouraging people to do it. It’s part of Congress’s strategy for creating investment in the United States.

How are tokens considered for tax purposes?

report cryptocurrencies

Tokens, ERC-20 tokens, or ERC-721 tokens, are ultimately still treated as property. There is a US dollar term for the purchase price, and then there’s a sale price. You’re going to subtract those to calculate what the gain might be or the loss. So it doesn’t matter what the token was doing. 

A lot of these tokens may be stable value coins. They’re worth a dollar, but a lot of stable value coins fluctuate up and down a bit.  

You can calculate the gain and loss of those, but should expect that to be pretty close to zero in most situations. 

Still, all tokens in all cryptocurrencies are treated as property and taxed as property.

Now we’ve identified two different ways that can happen.

We have capital gains, which comes from investments, and then you have income. 

For example, if my employer paid me, or if I did some work for somebody out of a contract basis, that coin that came in is income. A hundred percent of it is income. 

Now, I hold on to that coin and I hold it for a year, and then I sell – now that’s an investment. The cost basis of that coin is how much I declared as income when I received it. 

That’s how you determine the cost basis. 

What about some other characteristics?

What if you have done mining, how do you treat that income to report cryptocurrencies?

crypto tax reporting

Mining income is business income because it also has an expense. 

You have the cost of equipment, which can be depreciated and usually written off in the same year, the cost of electricity, and the other utilities involved. 

You do have costs with mining, which can offset the income, and you don’t have to pay as much as a staking income. 

Not having the expense side; you just have staking income. If you had income like interest from lending your coins to someone, these would be treated as interest. 

If someone gave you some cryptocurrencies, that would be a gift. Gifts are not taxed as income. People can give you all the coins in the world as gifts, but it’s not taxable to you. It is an exchange and is a taxable event to them. 

However, if it’s a charitable gift, they would report it as a charity. 

If it were a gift to a friend, the value of that coin on the date it was given is considered the sale price, and there’s a taxable aspect. 

Airdrops are a controversial point, because the IRS came out with an FAQ, here in October of last year, which angered a lot of people.

The IRS said airdrops are treated as income on the day that they’re received. But as many people found out, the coins that you received by airdrops were sometimes not solicited, and it was dubious whether they were worth anything at the time that they were received or not. 

We talk about the fair market value of coins and fair market value is what an informed buyer and an informed seller would agree to for the price. 

When the airdrops that people have come out, there’s no market for some of these coins. So, the IRS had backpedaled on that. The advice they gave, you can treat two different ways.

One, is to treat an airdrop as income on the time it’s received, or you could classify it as $0, as a gift to you at $0. Then you won’t pay taxes on it when you sell it sometime in the future, that would be two different tax treatments that are out there. 

The difference has to do with the convenience of tax reporting. 

Although the first approach I told you about, treating it as income, would be the more appropriate way to manage them. 

When you transfer coins from your wallet to an exchange or back and forth, the act of moving is not a taxable event. There’s no gain. It’s still your coin after you transfer it. Although you might have been putting it into the custody of an exchange for that time, it’s still your coin. 

Those are some broader characteristics.

Report Cryptocurrencies With Reliable Resources

If you have a more complex situation, you can talk to the people at Accointing on their chat web page.

You can also contact me on my website DonnellyTaxLaw.com and schedule a consultation for a fee; we can go over whatever your particular situation is.

You can also visit our website for do-it-yourself resources for doing your taxes.

Stay Tuned For Part Three Of The Crypto Tax Webinar

Subscribe to our newsletter to be notified and to get our free download, This Deadly Crypto Mistake Could Cost You $10K.

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IRS History With Crypto – The Crypto Tax Webinar: Part One

Learn about IRS history with crypto, the current policies regarding crypto-taxation, and review the IRS crypto letters and their different implications.

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:

  1. How to deal with COVID 19: Paying Crypto Taxes On An Installment Plan
  2. The current on-going policies regarding crypto-taxation
  3. What are taxable events and how to handle them
  4. The sent IRS letters and the different implications for each of them
  5. The next steps in order to conduct your crypto tax submission
  6. Some opinions from a top Crypto CPA in the market and average estimate of how much you will be paying in taxes
  7. 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

IRS history with crypto

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

IRS history with crypto

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 history with crypto

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?

IRS history with crypto

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?

cryptos reported on anti-money laundering forms

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.

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