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IRS Cracking Down on Cryptocurrency Tax Evasion, Seeks Private Crypto Tax Contractors

Updated on 21/07/2020 11:00 AM HKT

The Internal Revenue Service (IRS) has requested help from independent consultants to crack down on non-compliance in cryptocurrency tax.

On May 12, the IRS sent out a Statement of Work (SOW) soliciting private contractors to aid in auditing tax returns related to cryptocurrency and virtual assets.

An email first reported by CryptoTrader.Tax read, “The Internal Revenue Service is engaging outside contractors to assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency. We are placing a few single-case contracts as pilots with a goal of publishing a solicitation and request for proposal for a larger multi-case contract. Attached is a sample Statement of Work describing the types of services we are looking for. I wanted to make you aware of our efforts in case your company has any interest in pursuing this type of work.”

Statement of Work Requirements

Per the SOW, the IRS is requesting help, from FinTech companies that develop or are proficient in cryptocurrency tax software, to aid in the reconciliation of reported crypto gains and losses on the tax returns of US citizens.

The process described in the SOW aims at using software to systematically obtain records of cryptocurrency transactions data from exchanges, wallets, data sites, and other data sources to create a more detailed and transparent tax report for the taxpayers under consideration.

Source: IRS SOW

It appears the service sought by the IRS is an efficient tool to compare information reported on tax returns with the information provided by exchanges and digital asset service providers to discern if any further audit should be carried out.

IRS More Knowledgable than Ever on Crypto

In Notice 2014-21, the IRS explained that they have applied general principles of tax law to determine that cryptocurrencies or virtual currency are classified as property for federal tax purposes.

In October 2019, the IRS announced the addition of a question to the US tax return form obligating citizens to disclose their cryptocurrency holdings as well as gains and losses.

The recent SOW sent out by the IRS highlights that the federal agency has become far more knowledgeable in the cryptocurrency space. In a section of the SOW entitled, “Services to be Provided”, they detailed how complex an individual tax return calculation can become when dealing with cryptocurrency as any one user could have “hundreds and thousands” of transactions in a single year on multiple platforms.

The request for aid is so far just a request and no crypto tax service providers have been legally forced to hand their users’ data over to the IRS. The SOW does state, however, that the contractors who do decide to take on the project will be required to testify at trial to explain any discrepancies in data for the IRS. “While more updates like this are expected in the coming years, services like Taxbit remain on top of government regulations of crypto and aim to make doing your taxes as easy as possible.”

Image via Shutterstock

Members of Congress Ask IRS for Relaxed Approach to Crypto Staking Taxes

Innovation friendly members of United States Congress have written to the IRS request a level-headed approach to taxing cryptocurrency staking rewards.

Four Representative of United States Congress have asked the Inland Revenue Service (IRS) to ensure they do not overtax staking rewards gained from cryptocurrency staking on Proof-of-Stake (PoS) blockchains, in a letter on Aug 4.

The letter put forward by Representatives Tom Emmer (R-MN), Darren Soto (D-FL), David Schweikert (R-AZ) and Bill Foster (D-IL) outlined the differences between PoS blockchain’s and Proof-of-Work (PoW) blockchains—like Bitcoin.

The letter explained:

“The Bitcoin network is secured by a relatively small number of “miners” who validate transactions as they “mine” new Bitcoins. In “proof of stake”, in contrast, all token holders can contribute to network security by “staking” their tokens and so many, or even most, token holders end up holding newly created tokens. This means that network security in proof-of-stake does not require massive amounts of energy consumption.”

The Congressional Representatives also believe that staking rewards should be taxed but that the IRS could be over estimating traders actual gains made via staking rewards.

Per the letter:

“We believe that taxpayers’ true gains from these tokens should indeed be taxed. However, it is possible the taxation of ‘staking’ rewards as income may overstate taxpayers’ actual gains from participating in this new technology.”

Representatives Letter to IRS Gains Crypto Support

The letter to the IRS was applauded by members of the cryptocurrency community and today Aug 5, the Proof of Stake Alliance (POSA) published a response on Medium commending the request by the four crypto-forward members of Congress.

“We applaud Congressmen Schweikert, Foster, Emmer, and Soto for their forward-looking leadership to ensure Proof of Stake blockchains and their ecosystems aren’t unduly burdened by regulatory red tape,” said Alison Mangiero, President of TQ Tezos, a POSA member company that builds open source software and drives adoption and awareness of the Tezos protocol. “Staking rewards, similar to a farmer cultivating produce and selling it at market, should be assessed for taxation when they are sold: we don’t tax an apple when it is plucked from a tree or a tomato fresh off the vine. This letter offers a common-sense solution for the IRS to support the development of this promising new technology and encourage more Americans to participate in its growth.”

IRS Already Under Scrutiny For Crypto Prejudice

As reported by Blockchain.News, the IRS has already come under fire as the Taxpayer Advocate Service, an independent department of the IRS and its official watchdog, recently alleged that Letter 6137 which demanded tax payer crypto disclosure in 2019—did violate the congressionally enforced Taxpayer Bill of Rights.

James Harper, a Bitcoin researcher, is the first to come forward and sue the IRS, its commissioner and nearly a dozen of its agents for violating his Fourth and Fifth Amendment rights—his right to privacy and right to due process—through an illegal seizure of his records and for their infamous “soft” crypto Letter 6137, sent out in July last year.

According to the lawsuit, James Harper v. Charles P. Rettig, et al. before the United States District Court of New Hampshire, Mr. Harper argues that the IRS has “acquired the unbridled power” to demand and seize Americans’ private financial information from third parties without any judicial process which violates the Fourth and Fifth Amendments and statutory protections.

Harper who is a former Coinbase and Abra user, received the infamous IRS crypto Letter 6137 last year. The core message of the IRS’s letter was that the tax agency was already aware of all of the information on all US taxpayer’s digital assets and crypto accounts and demanded that they report their gains or offer a sworn letter of compliance under penalty of perjury—requiring nearly five years of tax documents in the process.

Portugal to Impose Taxes on Cryptocurrencies

Portugal’s government has announced plans to tax crypto income.

Fernando Medina, Portugal’s new finance minister, announced in the parliament on Friday that crypto coins will be subject to taxation in the coming future.

Medina stated, “many countries already have systems; many countries are building their models in relation to this subject and we will build our own”.

While the government has not developed details regarding crypto taxation, it has stated that future plans will include a tax on the gains of selling cryptocurrencies, among others.

António Mendonça Mendes, the Secretary of State for Fiscal Issues, further disclosed that the government will not only tax crypto gains but also include cryptocurrencies in other types of taxation, such as VAT and Stamp Tax.

According to the report, The Left Bloc (BE) – the left-wing opposition party – has proposed that cryptocurrencies be taxed in Personal Income Tax (IRS) like any other gain. The opposition argues that it would be disappointing if the Socialist Party (PS) – the ruling party – rejects to include such a change to the State Budget for 2022 to end the current “offshore of cryptocurrencies”.

Meanwhile, Mariana Mortágua, a member of parliament for BE said: “It is unbelievable how the PS refuses to tax fortunes created within seconds on the internet while maintaining the VAT on electricity and not increasing the minimum wage in the context of inflation”.

However, Mendes said: “We are evaluating by comparing internationally what is the definition of crypto assets, which includes cryptocurrencies. We are evaluating the regulations in this area, be it in the fight against money laundering and the regulation of markets, to present a legislative initiative that truly serves a country in all aspects, not a legislative initiative that makes the front cover of a paper”.

Strengthening Regulations

Portugal has been one of the few places in Europe with a 0% tax on Bitcoin, meaning profits from cryptocurrency trading are not taxed.

Changes in the blockchain industry have slowly evolved. Blockchain technology and cryptos are closely followed topics in the fintech industry by the Portuguese government and the relevant regulatory authorities.

In recent years, such technologies have been brought to public attention mainly because of the rise in crypto adoption and their market capitalization. The attention is driven by some significant developments that the Portuguese market has witnessed in recent years in this sector, majorly the rise of tech-based firms and the steady increase in the use of cryptocurrencies in the country.

Hopes Dashed for India's Crypto Community

The expectations of millions of cryptocurrency holders in India were dashed when the country’s federal budget for the year 2023 included no reference to cryptocurrencies or the technology known as blockchain. Many people in the cryptocurrency community in India had great hopes that the hefty cryptocurrency tax that was established in March 2022 will be lowered in some way.

Nirmala Sitharaman, the Indian Minister of Finance, delivered the union budget on February 1st, during which she announced many significant modifications to the income tax bands. However, over the course of the discussion, the minister did not discuss cryptocurrencies, digital currencies issued by central banks, or blockchain technology. As of the previous year, India imposed a tax of 30% on crypto earnings and a tax of 1% deducted at source (TDS) on all crypto transactions, which effectively put a stop to a growing business almost immediately.

The major goal of imposing a TDS on any and all cryptocurrency transactions was to compile an accurate count of the number of Indian people who are now engaging in cryptocurrency use. Beginning in May 2023, the information pertaining to this data will be made accessible to the government when Indians submit their income tax forms.

Within ten days of the new tax policy being implemented, the trading volume on major cryptocurrency exchanges in India plunged by 70 percent, and it dropped by almost 90 percent over the next three months. Cryptocurrency traders were driven to use offshore exchanges, and nascent cryptocurrency ventures were compelled to relocate outside of India as a result of the country’s stringent tax policy.

The previous Finance Secretary of India, Subhash Chandra Garg, said before that there should be a great deal more clarification about crypto taxation. He said that it was possible that the forthcoming budget for 2023 would not include any fresh modifications. In addition to this, Chandra was the head of the committee that was responsible for writing the first crypto law.

Binance Launches Tax Reporting Tool to Help Users Comply with Local regulations

Because the tax season is just around the horizon for many nations, businesses in the cryptocurrency sector will need to be ready to assist their customers in complying with the requirements that are in place in those countries.

The cryptocurrency exchange Binance made the announcement on February 6 that it would be developing a tax reporting tool to assist customers in keeping track of their cryptocurrency transactions for the purposes of filing tax returns.

According to the statement, Binance Tax provides its customers with the ability to receive a tax summary report that details any profits or losses that have taken place in their Binance account during the course of the year. This includes contributions made in cryptocurrency, spot transactions, and fork prizes that are based on blockchain technology.

According to the corporation, this decision was made in response to an increasing number of enquiries received from consumers concerning their respective tax responsibilities.

Currently, France and Canada are participating in the pilot programme for Binance Tax, which will later this year be rolled out to more worldwide areas inside the Binance ecosystem.

At the moment, it can only be used to access data that is stored on platforms owned and operated by Binance; however, the company has said that it intends to grow and eventually interface with other platforms used in the sector.

This follows the announcement made by Binance one month ago on its involvement in an association to ensure compliance with worldwide sanctions.

Over the course of the last year, global authorities have increased the pressure they apply to the cryptocurrency business. This is especially true in the wake of the FTX crisis, which rattled the market.

The Securities and Exchange Commission of Thailand recently made an announcement that it intends to tighten up regulations for the cryptocurrency business with a primary emphasis on the safety of investors. Exchanges in inquiries have been targeted for investigation by regulators in both South Korea and the Netherlands for alleged non-compliance with local rules.

The cryptocurrency industry has also caught the attention of regulators in the United States. Compliance issues led to a settlement that needed to be reached between the bitcoin exchange Kraken and the Office of Foreign Assets Control within the Treasury Department.

The United States Securities and Exchange Commission issued a call for companies in December 2022, requesting that they report their exposure to crypto bankruptcy and risks. In the meanwhile, the head of a House committee on crypto innovation has presented a measure that would let businesses can apply to government agencies for what is called a “enforceable compliance agreement.”

Arkansas passes Bitcoin mining regulation bill

Arkansas has become the latest state in the United States to pass a bill seeking to regulate Bitcoin mining activity within its borders. The bill, which has been named the Arkansas Data Centers Act of 2023, will now move to the governor’s office for final approval. If passed, the legislation would create guidelines for miners and protect them from discriminatory regulations and taxes.

The bill was proposed by Senator Joshua Bryant on March 30 and quickly passed by Arkansas’ state legislators. The legislation recognizes the value of data centers to local communities and acknowledges that they create jobs and pay taxes. As such, it seeks to regulate the Bitcoin mining industry in the state.

One of the key provisions of the bill is that digital asset miners must pay applicable taxes and government fees in acceptable forms of currency. Additionally, they must operate in a manner that causes no stress on an electric public utility’s generation capabilities or transmission network.

Under the legislation, crypto miners will have the same rights as data centers. The bill outlines that Arkansas’ government should not impose different requirements for digital asset mining businesses than those that apply to data centers.

The move by Arkansas follows a similar initiative in Montana, where the state’s Senate passed a bill to protect crypto miners operating within the state. The legislation is designed to protect miners against taxes on digital assets used for payments and eliminate energy rates discriminating against home crypto miners and digital asset businesses.

In contrast, in November 2022, New York’s Governor Kathy Hochul signed the proof-of-work mining moratorium into law, banning crypto-mining activities in the state for two years. On a federal level, President Joe Biden introduced a budget proposal on March 9 that could subject crypto miners in the United States to a 30% tax on electricity costs aimed at reducing mining activity.

The regulation of Bitcoin mining in the United States is gaining momentum, with individual states proposing legislation to govern the industry. The Arkansas Data Centers Act of 2023 is just the latest in a series of bills designed to create guidelines for miners and protect them from unfair treatment.

Spanish Tax Agency Cracks Down on Crypto Holders

The Spanish Tax Administration Agency (AEAT) wants to send out 328,000 warning notifications to individuals who are responsible for paying their taxes for the 2022 fiscal year. This move is being made in an attempt to collect taxes on crypto assets. The number of notices has climbed by forty percent in comparison to the previous year, reaching a total of fifteen thousand in 2021. This rise is a clear indication that the monetary authorities are beginning to take the matter more seriously.

The efforts of the AEAT to collect taxes are not primarily concentrated on cryptocurrencies and related assets. This year, more than 660,000 people who underreported their rental income will get a notice, and 807,000 people who did not record their income earned outside the country will receive a notice. Both groups will receive letters. The notifications function as an offer to voluntarily pay the tax, the rate of which ranges between 19% and 23% and applies to profits realized from the sale of digital assets. Those who are late in making their tax payments will be liable to a fine of an extra 26%, which will be determined based on the total amount of money that remains due.

According to the research published by the National Securities Market Commission in August 2022, there is a rising population of crypto asset holders in Spain. According to the report, 6.8% of the country’s population now own crypto assets. The majority of these holders have at least some level of higher education, are between the ages of 35 and 44, and make more than 3,000 euros per month. The nation also has the most cryptocurrency ATMs in all of Europe, with 231 machines, which accounts for around 15% of the entire number. This places it in first place in Europe. Spain comes in at number four on the global scale, after the United States, Canada, and Australia.

The expanded efforts of the Spanish Tax Administration Agency reflect a rising pattern of governments throughout the globe striving to regulate and collect taxes on crypto assets. This trend was highlighted by the enhanced efforts of the Spanish Tax Administration Agency. This should not come as a surprise considering the expanding usage of cryptocurrencies across a wide variety of sectors, as their popularity continues to rise. Individuals and enterprises need to ensure that they are up to date on their tax duties in order to prevent the possibility of facing legal repercussions as a result of the proliferation of crypto assets.

IRS Delays Crypto Reporting Requirements for US Businesses

The United States Internal Revenue Service (IRS) has recently announced a significant change concerning the reporting of cryptocurrency transactions by US businesses. Initially, as part of the Infrastructure Investment and Jobs Act passed in November 2021, businesses were required to report any cryptocurrency transaction over $10,000 to the IRS, much like cash transactions. However, this requirement has been temporarily put on hold until a comprehensive regulatory framework is established.

This development, announced on January 16, 2024, indicates a step back from the IRS in enforcing the new rules, which had come into effect on January 1, 2024. The decision was influenced by a revision of the Infrastructure Investment and Jobs Act by the U.S. Treasury Department and the IRS. The law, as it stood, mandated businesses to report receiving cash or digital assets worth more than $10,000 within 15 days of the transaction. However, the IRS clarified that digital assets do not need to be included in this requirement for now.

The initial rules had received significant criticism from the cryptocurrency community. Many users and stakeholders in the crypto industry found the rules challenging to comply with, especially given the lack of clear guidance from the IRS. Coin Center, a cryptocurrency advocacy group, had previously filed a lawsuit against the Treasury Department, challenging the constitutionality of the law. The legal proceedings are still ongoing, but the law remains enforceable.

The IRS and the Treasury intend to issue proposed regulations concerning digital asset reporting. This will also involve a public commenting period, allowing stakeholders to voice their opinions and concerns. Digital asset advocates like the Blockchain Association have welcomed this decision, seeing it as a positive step forward given the complexities associated with reporting cryptocurrency transactions.

Despite the temporary relief, the requirement to report large cryptocurrency transactions remains a legal obligation. The IRS has not provided specific guidance on certain practical aspects, like how to report transactions from decentralized exchanges or block rewards exceeding $10,000. The law’s criteria for evaluating the $10,000 threshold in terms of cryptocurrency value are also unclear. The IRS’s pause in enforcing this requirement provides a window for the cryptocurrency community and regulators to work towards more practical and clear guidelines.

This situation exemplifies the ongoing challenges in regulating the rapidly evolving cryptocurrency market. As governments and regulatory bodies attempt to integrate digital assets into the existing financial and legal frameworks, they face the complex task of balancing regulatory requirements with the unique characteristics of cryptocurrencies. This delay by the IRS might be seen as an acknowledgment of these challenges and a willingness to engage with the crypto community to develop more effective regulations.