IRS Updates 1040 Income Tax Form, Lays Traps for Crypto Tax Cheats
Nicholas Otieno Sep 27, 2020 04:59
The IRS plans to update the 1040 income tax form for 2020 to make it more difficult for taxpayers to avoid declaring their crypto assets.
The US Internal Revenue Reserve (IRS) plans to update a question on the 1040 income tax form for 2020 that will require all US taxpayers to check a box if they have transacted any cryptocurrencies over the year.
A draft of the 2020 tax form has a question that asks taxpayers whether they have exchanged, sent, received, sold, or acquired any financial interest in cryptocurrency during 2020. Taxpayers would be able to check either a no or yes box.
The draft of the 1040 form indicates the question placed near the top of the tax form that reads: "At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?"
The question was included in the 2019 tax form but was placed in a part of the document that not all taxpayers had to fill out. Now, it is moving to the 1040’s most important spot, just below the taxpayers’ address and name.
The 2020 tax form is about to ensure that all taxpayers who engage in crypto transactions report them and thus removes excuses for ignoring the tax rules on Bitcoin or other cryptocurrencies.
The tax agency’s simple trick would make it more difficult for taxpayers to avoid declaring their crypto assets. A tax law expert told the WSJ that the question would make it easier for the taxman to win cases if the returnees check the “no” and are later found to have held cryptocurrency.
The tax administrator’s move is a strong warning to many cryptocurrency holders who are not complying with the rule of law that they must file required forms and pay taxes.
Last year, the IRS added a similar question concerning taxpayers’ offshore bank accounts, which resulted in the agency receiving over $12 billion in taxes.
IRS Warning Crypto Holders
The tax agency is getting more serious about crypto tax compliance. Last year, the IRS sent warning letters to thousands of crypto holders who failed to pay the necessary taxes or improperly reported taxes in the virtual assets. People who own crypto assets in the US got these letters in their mailbox.
It is not known how the IRS got the user list. However, the list of names was obtained through “various ongoing IRS compliance efforts.” The agency may have relied on blockchain analytics software such as Palantir, Chainalysis, and Coinbase analytics to de-anonymize on-chain privacy coin transactions.
In 2018, Coinbase crypto exchange alerted 13,000 customers that it was complying that a court order to provide the IRS with information on accounts that had transacted at least $20,000 from the years 2013 to 2015. However, the IRS did not mention whether it obtained its mailing list from the Coinbase trading platform.
IRS treats all digital currencies like Bitcoin, Ethereum, XRP, and other cryptocurrencies as property under US tax law. That implies that just like real estate, the exchange or sale of digital assets for other goods is a taxable event. Also similar to stockholders, crypto holders are required to report capital loses and gains from cryptocurrency trades.
Taxpayers who fail to pay the taxes they owe in their digital currency transaction can be subject to penalties and interests, and even criminal prosecution in more serious cases.
Image source: Unsplash
