A law firm has warned Coinbase users in the U.S. that the IRS is coming after them—and they should stop burying their heads in the sand when it comes to tax.
Klasing Associates says a transparency report released by the crypto exchange in October should serve as a “major wake-up call” to those who haven’t reported their virtual currency holdings in recent years.
The Coinbase report revealed that it had received 1,914 requests for information from law enforcement in the first half of 2020—58% of which came from U.S. agencies. A breakdown of these requests showed the FBI, CIA and the IRS are among the “top receivers” of data.
Urging crypto owners to act now, the law firm added: “This data makes it clear that the IRS is requesting information from Coinbase for the express purpose of checking it against its own taxpayer data and looking for discrepancies where holdings on Coinbase have not been reported on taxpayers’ returns.”
Coinbase users were also told that they still have a chance to make amends if they failed to disclose their crypto holdings on past returns, or “filed an incomplete or misleading picture” of their financial circumstances. Doing so can result in a “nearly guaranteed pass on criminal tax prosecution,” and can even lead to civil penalties being waived. However, it will be too late to take advantage of a voluntary disclosure program if an audit or investigation begins.
In issuing the transparency report, the exchange said that it firmly believes in protecting the financial privacy of users—but warned it has an obligation to respond to requests from law enforcement when they are valid under financial regulations and other applicable laws.
Poacher turned gamekeeper?
Back in July, records uploaded to a government website showed that Coinbase has signed a contract with the IRS that’s worth at least $125,000. When rumors of that deal began to circulate, a Twitter poll suggested that 66% of respondents were prepared to stop using their accounts as a result—alienated by how the company had gotten into bed with the taxman. Days earlier, it had also emerged that Coinbase had inked a four-year deal with the U.S. Secret Service worth $183,750.
The IRS has made sweeping changes to Form 1040, which Americans fill in when submitting their individual income tax return, that mean a question about virtual currency ownership now appears on the very first page. With the coronavirus pandemic resulting in a surge in government spending as tax revenues dry up, it’s clear that the agency is determined to recoup every single dollar that it is owed.
However, it’s worth noting that—in most cases—crypto consumers aren’t deliberately trying to sidestep their tax obligations. Usually, they simply don’t realize that selling Bitcoin for a chunk of change makes them liable for a repayment. The lack of malice is evidenced by how few investors make full use of the deductions that they are also entitled to claim.
In April, a report by the cryptocurrency accounting platform Blox and tax software provider Sovos revealed that most digital asset owners are “alarmingly unaware” of the taxes they owe. Half of American accountants polled for the research revealed that they believe most of their clients who own digital assets are likely to be audited and owe back taxes.
Another problem many tax professionals have warned about is that they haven’t been able to provide an accurate representation of their client’s activities because of a lack of recordkeeping, with many investors failing to keep track of their transactions.
Stepping up their game
Some crypto exchanges are beginning to take a more proactive approach—helping their users to keep on top of their tax obligations in real time. Last month, Gemini announced that it was integrating TaxBit’s Tax Center Suite into its products—complete with “trade alerts when tax saving opportunities are available.”
Since last summer, the IRS has been sending thousands of warning letters to cryptocurrency owners. While some serve as a gentle reminder that their holdings need to be included on tax returns, others are far more strongly worded and give the recipient a deadline to get their paperwork in order.
Those who haven’t received one of these messages yet shouldn’t necessarily breathe a sigh of relief. According to Bloomberg Tax, crypto users could still face enforcement action even if a letter doesn’t land on their doormat.