GENERAL BACKGROUND

As briefly mentioned in our blog last week, the Green Book offers new details on the various proposals included in the President’s Made in America tax plan.

In this week’s blog, we will focus on the proposed changes relating to the reporting requirements for cryptocurrencies and what options you have to remediate any historical disclosure issues regarding cryptocurrencies held.

INTRODUCTION

Cryptocurrency is probably the most talked-about topic by tax authorities across the world due to the rapidly growing problem of evading tax with cryptocurrencies.

Since the industry is entirely digital, taxpayers can transact with offshore crypto exchanges and wallet providers without leaving the US. The global nature of the crypto market offers opportunities for US taxpayers to conceal assets and taxable income by using offshore crypto exchanges and wallet providers. US taxpayers also attempt to avoid US tax reporting by creating entities through which they can act. To combat the potential for crypto assets to be used for tax evasion, third-party information reporting is critical to help identify taxpayers and bolster voluntary tax compliance.

This blog is not intended for people who are willfully using cryptocurrencies to avoid paying taxes to the IRS.

This blog is intended to give guidance to people who have had dealings with cryptocurrencies in the past and neglected to disclose such dealings in their tax returns and how they should approach this going forward.  

DO I NEED TO REPORT CRYPTOCURRENCIES ON MY TAXES?

The answer is yes, you do need to report crypto on your taxes if it resulted in a taxable event.

For the first time ever, the IRS has placed a question at the top of the 2020 Form 1040 that asks:

at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Essentially, by adding this question front and center on Form 1040, the IRS is indicating that you can no longer claim you simply did not know you were supposed to report it.

By checking yes to the question above, the IRS will look to see if you also filed a Form 8949, the same form used when reporting gains and losses on stocks or equities. And if you fail to file this form, you can almost certainly expect to be audited.

But, as mentioned above, not all cryptocurrency activity is taxable. For purposes of this blog, we will not be discussing in detail what does and does not constitute a taxable event.

The only important thing to remember is that it is possible to report cryptocurrencies as both property and income depending on how you used it. For example, if you were paid in cryptocurrency for a service rendered and use that cryptocurrency to buy a sandwich at a participating merchant, you would be required to report your cryptocurrency income on Form 1040 in addition to filing form IRS 8949 for your capital gain or loss when disposing of the crypto to buy the sandwich.

PROPOSED REPORTING REQUIREMENT CONCERNING CRYPTOCURRENCIES

It is proposed that a comprehensive financial account reporting regime is introduced to improve tax compliance. Financial institutions would report data on financial accounts in an information return. The proposal specifically refers to crypto asset reporting, and states the following –

‘Separately, reporting requirements would apply in cases in which taxpayers buy crypto asset from one broker and then transfer the crypto assets to another broker, and businesses that receive crypto assets in transactions with a fair market value of more than $10,000 would have to report such transactions.’

The proposal would be effective for tax years beginning after December 31, 2022.

In addition, it is proposed to expand broker information reporting with respect to crypto assets.

The proposal is to expand the scope of information reporting by brokers who report on crypto assets to also include reporting on certain beneficial owners of entities holding accounts with the broker.

Brokers, including entities such as US crypto asset exchanges and hosted wallet providers, would be required to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker. Should the proposal be adopted, which seems highly likely, a broker would be required to report gross proceeds and such other information as the Secretary may require with respect to sales of crypto assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners.

The proposal would be effective for returns required to be filed after December 31, 2022.

WHAT ARE MY OPTIONS FOR NON-COMPLIANCE?

First and foremost, the non-compliant taxpayer must fully analyze all of his civil and criminal risks due to not reporting cryptocurrencies. It recommended to not attempt this alone and make sure you seek professional help in relation to this.

If there is no criminal exposure, the taxpayer could consider filing a qualified amended return (QAR). The added benefit of filing a QAR, is that it assists taxpayers to avoid accuracy related penalties.

If a taxpayer is disqualified from filing a QAR, he or she should consider the remediation options made available by the IRS.

The remediation options include the following programs with the IRS –

streamlined procedures – including the streamlined domestic offshore procedures (SDOP) and streamlined foreign offshore procedures (SFOP); and
the Updated Voluntary Disclosure Program (UVDP).

You will be ineligible for any of the remediation programs if:

You are already under examination or investigation by the IRS or a law enforcement agency; or
You have been notified by the IRS of its intent to examine or investigate.

It is extremely important to note that the success of remediation will depend on whether the noncompliance was willful or non-willful.

THE OSTRICH EFFECT  

In behavioral economics, the Ostrich Effect refers to the tendency to avoid negative financial information.

The ostrich’s method for solving financial problems is to ignore them for as long as possible, and then to respond in utter panic and agonizing stress when they are finally forced to act. Not only does avoiding uncomfortable truth keep them from solving those problems: It compounds them.

Noncompliant taxpayers, have options available to remediate their historical noncompliance and we recommend utilizing these options rather sooner than later.

Our trusted advisors at Asena, have successfully advised and assisted numerous noncompliant taxpayers by remediating their cryptocurrency non-compliance.

So don’t stick your head in the sand with the hope that your problems will disappear. The reporting requirements are here to stay and will continue to be enforced for as long as cryptocurrencies are around.

At Asena Advisors we make sure that your specific needs are catered for and ensure that you make informed decisions based on the proposed tax changes, instead of decisions based on an article written regarding the changes.

Shaun Eastman