IRS seeking crypto expertise
Regulation

Crypto tax firm: IRS seeking audit expertise

CryptoTrader.Tax received an email inviting it to bid for work helping the taxman ‘calculate gains or losses,’ but flatly rejected the offer

IRS seeking crypto expertise

A platform that helps cryptocurrency traders fill out their tax returns revealed it was invited by the Internal Revenue Service to perform audits… but turned the agency down.

CryptoTrader.Tax revealed in a blog post this week that it had received an email that said: “The Internal Revenue Service is engaging outside contractors to assist our revenue agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency.”

The taxman went on to attach a statement of work describing the services it was looking for, and asked if the company was interested in getting involved.

The CoinLedger-owned company wasted no time in giving its response: “The CryptoTrader.Tax team will not be pursuing this contract. Our full focus is on serving our customers and making the cryptocurrency tax reporting process as seamless as possible.”

It’s not that strange a reaction. The cryptocurrency community’s strong libertarian streak aside, companies really can’t earn customers’ trust if they’re working both sides of law enforcement actions

An enlightening email

One of the more interesting elements of the CryptoTrader.Tax blog is the statement of work itself, which helps reveal the scope of what the IRS is hoping to achieve.

IRS seeking crypto expertise
IRS Criminal Investigation Division badge (Photo: Wikipedia)

It seems the taxman is hoping to find a provider who can aggregate transactions across multiple exchanges and digital assets, and value them at the point of purchase. 

“Specialized technology and infrastructure is required to digest, contain and analyze virtual currency data due to unique requirements such as but not limited to decimal place precision, varying field formats, and file formats.”

Which is to say that the IRS isn’t really set up to deal with transaction amounts like 14.74689365 BTC. As the smallest amount of a bitcoin is one 100 millionth—one satoshi—the IRS will need whole new systems. That’s true with BTC at around $10,000. 

Now imagine if predictions of $100,000 or even $1,000,000 pan out. Add in vast price fluctuations over the course of minutes, and hundreds or even thousands of altcoins, accurately tracking gains and losses becomes very complex. Not impossible—blockchains are immutable, after all—but complex. Then add in things like hard forks, airdrops, and staking earnings.

Make a stand or take the stand

Which is what CryptoTrader.Tax does, importing users’ trades from dozens of major exchanges and churning out tax forms, audit trails, and other reports, then importing them into TurboTax.  

The IRS contractor would be expected to provide reports that include “potential gaps in completeness of data and/or accuracy of calculations,” recommendations on how this be corrected, and details of when the taxpayer’s data “is inconsistent from what would be expected from normal accounting practices.”

IRS seeking crypto expertise
“‘Cause I’m the taxman, yeah, I’m the taxman” (Photo: CryptoTrader.Tax)

Nor is the IRS just looking for back-end systems suppliers. The statement of work adds that, in some cases, the contractor may need to consult with the IRS during meetings with taxpayers or their accountants, assist the agency as it prepares to go to trial, and even testify as an expert witness.

A big crackdown

IRS seeking crypto expertise
Or Lokay Cohen

As reported by Modern Consensus, the IRS is clamping down on taxpayers who own crypto assets. Last year, it began sending letters with varying levels of severity—some asking taxpayers to double-check their filings, and others warning that forms needed to be redone or there would be consequences.

In September, Modern Consensus spoke to Bittax Vice President Or Lokay Cohen, who was toying with the idea of using Ethereum-based smart contracts so taxes can be paid automatically to the IRS. At the time, she vowed that the company had no intention of becoming “the next Chainalysis of taxes”—and said Bittax’s focus was on helping end users rather than the government.

“In the United States, it has been [said] that not many people are reporting [crypto] taxes. I think this is going to be a different situation after the IRS starts to actively pursue them,” she predicted.

Alarmingly unaware

But there is a potentially bigger problem afoot. Back in April, a report by the crypto accounting platform Blox warned many crypto holders are “alarmingly unaware” of the taxes they owe on their investments, and the deductions they are entitled to claim.  

One particularly alarming statistic from that report, which helps to illustrate why the IRS is ramping up its efforts to get a handle on cryptocurrencies, revealed that half of the U.S. accountants surveyed believe most of their clients who own digital assets are likely to be audited and owe back taxes. 

To make matters worse, 45% said many of their clients “know very little or nothing at all when it comes to understanding taxable crypto activity.”

C Sephton is a journalist with an interest in cryptocurrencies, personal finance, and financial inclusion—as well as the challenges the crypto industry faces in achieving mainstream adoption. He owns cryptocurrencies.