US Tax Advisor Tells Crypto Customers to Self-Report on Taxes, Even If Imperfectly

Astute observers of the 2019 Schedule 1 tax form will notice a new question at the top of the page: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Tax season for United States residents is fast approaching, and the IRS wants to know about everyone’s involvement in the crypto space. Thanks to a recently updated income tax form including a question about crypto activity, tax preparation companies like HR Block are advising filers to be sure to disclose their details.

The service maintains that providing any information, even if imperfect, could result more lenient treatment from the much-feared collection agency.

The New, Critical Question

The prompt can be unsettling even for those little to no involvement in the space. Perhaps a friend sent some dust to a wallet downloaded just for experimental purposes. Or maybe someone made a few transactions but soon forgot about the whole thing. Many are now wondering just what exactly the IRS knows about their activity, and what is necessary to report. Combined with as-of-yet unclear filing instructions, the whole thing becomes seemingly difficult to navigate.

Spill Your Sats: US Tax Advisor Tells Crypto Customers to Self-Report on Taxes, Even If Imperfectly

Tax Preparation Services Weigh In

Leading tax preparation services nevertheless say it’s best to spill one’s guts, and report everything. Kathy Pickering, chief tax officer at HR Block, says “The IRS is looking for people to self-report”, according to a recent article by Yahoo Finance. The outlet quotes Pickering as affirming details on how to report crypto are ill-defined, but maintaining:

They’re looking for you to come forward, and they’ll be more lenient, even if you don’t get it right, if you’re disclosing.

Popular online filing service Turbotax notes of crypto, “If you just buy it and hold onto it, it won’t be taxed until you do something with it. Even if you don’t receive a 1099-B, 1099-MISC, 1099-K, or summary tax statement for your cryptocurrency transactions, it’s your responsibility to report them.” The company’s post goes on to note that coins received as a result of a fork or airdrop also count as income, a point of contention for lawmakers with the IRS’s recently issued guidelines.

As news.Bitcoin.com’s Kevin Helms reported in December, a congressional letter to IRS commissioner Charles Rettig stated of the airdrop tax issue: “This creates potentially unwarranted tax liability and administrative burdens for users of these important new technologies and would create inequitable results. We do not expect this is the intended effect of the guidance, and we urge the IRS to clarify the matter.”

Spill Your Sats: US Tax Advisor Tells Crypto Customers to Self-Report on Taxes, Even If Imperfectly

Popular tax assistance service Jackson Hewitt notes in its year-end tax tips publication that “If you invest in or use crypto currency the IRS is looking for you to report the information on your tax return. Make sure you have your records for all transactions during the year.”

Though the theme of exhaustive self-reporting is clear, the critical questions remaining have to do with amounts, types of transactions, and the aforementioned issues with forks and airdrops, which mean some hodlers may need to go back and tediously re-file forms from years ago. Due to this ambiguity some might be reticent to tick that box on the Schedule 1 at all, knowing that perceived improper reporting may lead to unwanted and even dangerous attention.

Blockchain Surveillance and What Tax Agencies Know

The formation of mega-intelligence groups like the Joint Chiefs of Global Tax Enforcement (J5), and the U.K. tax agency’s recent offering of $130,000 for blockchain surveillance assistance, show the tax authorities mean business. What is not so established is how much they know about the average crypto user. For those keeping funds on centralized exchanges, it’s almost a sure bet they’re ‘on the books,’ as such groups have established compliance agreements with governments. The benefits here for reporters being easily downloadable forms and records from exchange databases making the process less complicated, if at the critical expense of privacy.

Some experts in the space say the IRS may just be fishing, with no efficient way to process the legions of people using crypto, though they know via NSA tracking who all of these users are. Enrolled Agent and crypto tax advisor Clinton Donnelly told news.Bitcoin.com in August that the agency may be issuing its crypto warning letters in lieu of other means to ensure compliance. “If they scare enough people they can get the same result”, Donnelly noted, claiming that crypto traders are “low-hanging fruit” for the IRS.

Whatever the reality, threats associated with falling afoul of groups like the IRS are not imaginary, so concern with proper reporting is more than understandable. In this context it’s not as hard to see why some might (ill-advised as it may be) choose to eschew honesty and leverage the utility of crypto for a different childhood virtue: keeping a secret.

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