More Crypto Tax Enforcement.
It’s no secret that the IRS is after crypto tax dollars and after fans of crypto who don’t report or who don’t do it correctly. The Inflation Reduction Act, which passed the Senate on Sunday, raises taxes and will give the IRS billions to go into what the Wall Street Journal called “beast mode.” In all, the bill will dole out about $80 billion to the IRS for increased enforcement, operational improvements, customer service, and systems modernization. That $80 billion is more than six times the current annual IRS budget of $12.6 billion. The bill says a whopping $45.6 billion will be for enforcement, which is the main directive from Democrats to the IRS. Get bigger, tougher, and faster at collecting. Reports suggest that the IRS will hire 87,000 new agents, and with $45 billion being shoveled into IRS “enforcement,” change is coming. There isn’t a dollar amount fixed for going after crypto, but the new law vaguely says they’ll be specifically pursuing “digital asset monitoring and compliance activities,” apart from more general tax enforcement. Think audits, collections, and worse. The IRS is updating its forms too. There is already a virtual currency question at the top of the tax return you filed—or still, need to file—for 2021. As we will see, that question will be tougher in 2022.
For 2021 returns, the seemingly innocuous question asked, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS says that all taxpayers filing Form 1040, Form 1040-SR, or Form 1040-NR must check one box answering either “Yes” or “No” to the virtual currency question. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021. You can read the IRS reminder here. In taxes, a simple yes or no question can be a surprisingly big deal—if you answer wrong. But can you check “No?”
Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box when they have not engaged in any transactions involving virtual currency during the year, or their activities were limited to (1) Holding virtual currency in their own wallet or account. (2) Transferring virtual currency between their own wallets or accounts. (3) Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPalPYPL +4.7% and Venmo. (4) Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.