The United States Internal Revenue Service has been blinded by its desire to beat cryptocurrency. It rushes to enforcement without first thinking about the best way to get there. It has spent millions of dollars on taxpayers training its staff and recruiting private contractors to expose non-compliance by crypto users. The IRS arms its people to aggressively enforce the tax laws that apply to cryptocurrency. All the while, it ignores “established” frameworks to help achieve tax compliance and crypto transaction collection.
Crypto tax amnesty is the easiest and fairest way to get from point A to point B, but the IRS favors dishonest and aggressive tactics that disproportionately affect one population of taxpayers – the young.
That framework, a highly publicized amnesty program, started more than 10 years ago. A nice blueprint will already follow. In March 2009, the IRS announced a foreign tax amnesty program called the Offshore Voluntary Disclosure Program or OVDP. The program came in response to the fact that U.S. taxpayers did not disclose their foreign bank accounts and did not report billions of dollars in tax on foreign income. In exchange for voluntary disclosure and payment of tax, OVDP offered taxpayers the opportunity to avoid criminal charges and pay much lower fines (sometimes none at all). Without OVDP, taxpayers faced jail time and a variety of draconian civil penalties. The program was a great success – about 15,000 disclosures were made in just seven months, settlement nearly $ 3.5 billion in back taxes, fines and interest.
Given the utility of OVDP, the IRS expanded the program with several iterations. In all, about 56,000 taxpayers have filed in, and the IRS has collected more than $ 11 billion in back taxes, interest, and fines. Even the worst forecasting indicator could predict a similar outcome with a crypto tax amnesty program. Consider this: there is a crypto “tax gapFrom $ 25 billion, nearly 37 million Americans now owns some form of cryptocurrency, and the Compliance rate is only about 50%.
The tax gap is wide enough, the population is numerous and the compliance rate is dismal. Therefore, crypto tax amnesty could bring in far more disclosures than OVDP and collect many more tax dollars. The similarities are clear, but several key differences further advance crypto amnesty.
Crypto User Demographics
The first difference is in the demographic of crypto users. Almost 60% of Bitcoin (BTC) users are under the age of 35, 17% of whom have barely finished high school, currently in their early twenties. This is important because this demographic is by far the least experienced group of taxpayers. Unlike taxpayers who transact abroad, millennials are the least likely to recognize the nuances of reporting capital gains and losses, limits on capital losses, disallowing capital expenditures, losses carried forward, increased base, transfer base, and base adjustments. and the list goes on.
Despite this inexperience and youth, the IRS refuses to offer crypto users a tax amnesty program. Instead, the IRS offered tax amnesty to a much more experienced group of taxpayers involved in foreign transactions. These taxpayers much more understand the nuances of tax law and employ tax attorneys and CPAs, and are more likely to be tax “ cheats, ” while crypto evaders are often unintentional. Despite this, the IRS unscrupulously targets the least experienced demographics.
There is even more dishonesty than simple demographics. Foreign bank accounting, or FBAR, is a fundamentally solid area of tax law, while cryptocurrency tax is not. Fairness dictates that amnesty should be provided based on the simple fact that cryptocurrency taxation is often misunderstood and is a new and emerging area of tax law. The rules aren’t properly regulated, and the current IRS guideline consists of just two IRS notices and a set of FAQs – which are not legally binding on the IRS, by the way. That is, a crypto taxpayer cannot legally rely on it. Until legally binding guidelines are released and the rules are better developed, crypto tax amnesty is the fairest solution.
Crypto demography is further hampered by the fact that third party crypto transaction reporting is virtually non-existent (only two of nine US-based cryptocurrency exchanges have published policies on transaction reporting). In other contexts, taxpayers can rely on annual 1099’s or brokerage statements to report their base and capital gains or losses. This is not available to most taxpayers in their 20s who are in the business of cryptocurrency transitions and are probably only used to simple W-2 tax returns. Instead, they have to sit down with pencil and paper and track bargain prices (without being able to rely on the NYSE), set fair market values, adjust their bases and calculate their gains and losses across multiple exchanges at different times with different fees.
Crypto Tax Forms
Coinbase, one of the largest and most popular exchanges switched of issue 1099-K forms 1099-MISC forms. This is important because the reporting thresholds for the latter are much lower. For Form 1099-K, a reporting requirement applies if the taxpayer crosses more than 200 transactions or a threshold of $ 20,000. In contrast, 1099 MISCs are issued if a taxpayer receives more than just $ 600 in payments during the year. Now, due to lower thresholds, tens of thousands of taxpayer names are being provided to the IRS – all with no mention of the basics. Until third party reporting of cryptocurrency is consistent with other capital transactions, crypto tax amnesty is the fairest solution.
Or worse, maybe some young taxpayers are getting paid in cryptocurrency or buying and selling products using cryptocurrency. In that case, they have to calculate a reasonable FMV for the cryptocurrency that changes hands at different times – while keeping their base. It is not difficult to imagine a young taxpayer keeping a constant log of the cryptocurrency received for services rendered or goods exchanged, making appropriate FMV adjustments on multiple exchanges at different times.
If a person receives Bitcoin on day 1 in exchange for selling a video game, and then receives Bitcoin on day 2 for selling sunglasses, he must calculate the FMV of the Bitcoin earned at various intervals, minus basis, all with a solid understanding of the impact of self-employment tax and the need to pay estimated taxes. The young taxpayer’s logbook can rival that of a truck driver. The missteps here are many, and crypto tax amnesty is the fairer solution, far fairer than crypto-based self-employment tax audits.
To add salt to the wound, there is no IRS yet de minimis rule for crypto transactions involving even the smallest real estate purchase. The young taxpayer could undoubtedly gain added value if he bought a pack of chewing gum with it XRP (a pack of gum costs $ 1.50 and Ripple is trading around $ 0.50). Because he received something of value beyond the XRP he paid, he has added value. In this regard, the current IRS regime teeters on the brink of absurdity.
And finally, the IRS directive on cryptocurrency tax does not mention any fines for non-compliance, while FBAR guidelines are fraught with discussions about fines. To a sensible one de minimis exception is established, and until the IRS adequately educates young crypto users about fines for non-compliance, crypto tax amnesty is the fairest solution.
The Taxpayer’s Bill of Rights
The taxpayers’ Bill of Rights tackles this problem of dishonesty by shouting amnesty from the lungs.
The right to be informed, says:
“Taxpayers have a right to know what to do to comply with tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the results. “
The right to a fair and just tax system, says:
“Taxpayers have a right to expect the tax system to consider facts and circumstances that may affect their underlying liabilities, ability to pay or ability to provide timely information.”
The IRS is taking its burden with FBAR but failing miserably with its cryptocurrency taxation policies. It attacks the least experienced taxpayer, but rewards the most experienced taxpayer. It alerts the most experienced taxpayers to fines, but leaves the least experienced taxpayers behind. It ignores that third-party reporting does not provide a quarter to young taxpayers. It imposes complex tax nuances on the simplest demographics and ignores the folly of checking that gum packet.
Crypto-amnesty has received little fanfare because the right people aren’t worried – it’s a young person’s tax problem. Big banks and big companies cared about reporting foreign bank accounts and a tax amnesty program emerged, but crypto users don’t have a centralized support to back them up. In fact, their existence is based on decentralization. Unfortunately, until the “right” people are hit, crypto tax amnesty is unlikely. But if institutional integrity matters, the IRS should expand the olive branch – despite the absence of the “big hitters.”
The IRS Commissioner, with all due respect, is opening the borders and offering amnesty to this flow of young taxpayers. It requires a fair and just tax system.
The views, thoughts and opinions expressed here are solely of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jason Morton is an attorney in North Carolina and Virginia and is a partner at Webb & Morton, PLLC. He is also a Judge Advocate in the Army National Guard. He focuses on tax defense and tax litigation (foreign and domestic), estate planning, corporate law, asset protection and cryptocurrency taxation. He studied blockchain at the University of California-Berkeley and law at the University of Dayton and George Washington University.