Following the recent addition of two former crypto executives by the US Internal Revenue Service (IRS), tax professionals expect increased sector oversight.
Prioritizing Digital Asset Taxation
A recent press release states that digital assets have become one of the IRS’s most strategic focus regarding tax revenues. Therefore, the IRS has taken significant steps to ensure compliance from crypto-related entities.
James Creech, an attorney and senior manager at the prominent accounting company Baker Tilly, opined that many should expect a significant rise in enforcement activities soon. The IRS aims to achieve its primary goals by generating funds per the Inflation Reduction Act.
With billions of dollars spent on improving its oversight and enforcement actions, the tax agency has tasked its criminal team to look into more digital currency tax cases, as shown in the division’s 2023 annual report. These investigations highlighted several financial matters, such as unreported capital gains, mining-related income, and other factors that complicate digital currency taxes.
Collecting Crypto Data And Closing The IRS Tax Gaps
Eric Hylton, the national director of compliance at Alliantgroup, anticipates an uptick in lawsuits spurred by “John Doe summons” issued by the IRS. These summons mandate firms to disclose crypto transaction data exceeding a specified threshold.
As a former IRS commissioner for the small business and self-employed division, Hylton foresees a notable increase in crypto tax enforcement. An alternate avenue through which the IRS is accessing crypto data is via questions regarding digital assets on the front page of users’ tax returns.
Taxpayers must respond to a yes-or-no question on Form 1040, and failure to provide accurate information could attract IRS scrutiny. As part of a broader initiative to “close the tax gap,” the US Department of Treasury and the IRS proposed tax reporting regulations last August.
These regulations cover cryptocurrency, NFTs, and other similar transactions beginning in 2025. Recall that President Joe Biden established mandatory annual tax reporting requirements for digital currency brokers in 2021 with the bipartisan infrastructure deal, which has since been passed into law.
Per the Joint Committee on Taxation, this move is estimated to generate nearly $28 billion over a decade. However, the constant changes in regulations mean that the landscape of crypto tax reporting has been characterized by what Creech termed “very hodgepodge.”
Presently, exchanges give out different forms that often lack the correct original purchase price information needed to determine gains. Hence, Creech stated that individuals are primarily responsible for how they report their gains to the tax agency.
