For the longest time, cryptocurrency has existed in a tax reporting gray zone, but the IRS is looking to crack down on crypto wallets. The IRS and White House have a lot to gain from collecting unpaid taxes, but is it possible for crypto holders to avoid IRS clampdowns?
To Avoid IRS Clampdowns, Know-How Crypto Avoids Tax Collection First
To avoid IRS clampdowns isn’t a good enough reason to avoid paying taxes, the IRS hasn’t made it easy for people with crypto wallets to declare their profits. On top of that, the IRS isn’t transparent with what forms you’re supposed to use for any kind of filling beyond standard employment.
A recent example of this was the fillable 1099-NEC form, which is now used to report self-employment income, replaced the 1099-MISC form in 2020, leading to several audits.
The first time the IRS asked taxpayers if they’ve dealt with cryptocurrency was in 2019 on Schedule 1 (for Form 1040 or 1040-SR), but most people won’t ever use that form. A Schedule 1 is explicitly used to report income outside of Form 1040, like alimony or capital gains.
To make things easier, the IRS put the question directly on 1040, but that doesn’t solve the main problem of back taxes or reporting crypto amounts. While some crypto exchanges have started to issue 1099-Ks to wallet holders, it doesn’t factor in how much you paid for the crypto.
How The IRS Finds Crypto “Tax Dodgers”
It’s clear that the IRS wants a piece of the action, but it isn’t clear how they’re finding crypto wallet holders in the first place. The next few sections should make it clear.
*What is Considered a Crypto Taxable Event?
The IRS treats virtual currency as property, meaning they’re taxed similarly to real estate or stocks. If you buy a cryptocurrency for $5,000 and sell it for $25,000, the capital gains tax will affect the $20,000 in profits. All dealings with cryptocurrency are considered taxable events.
Tax rates can vary from 10%-37% on mining proceeds, and crypto miners must pay taxes on the coin’s “fair market value.” Even crypto that sits in your wallet must be reported if you earned more than $600 on stalking or crypto rewards, regardless of whether it’s a business expense.
*What is the Extent of the Crack Down?
The IRS is able to direct crypto tax evaders by using new data analytic tools they can employ in-house. In response to finding more crypto wallet users, the IRS will issue a letter that gives the individual 30 days to respond, or they’ll look through their file and start auditing.
In the 2022 budget proposal, President Joe Biden wants to raise the top tax rate on long-term capital gains from 23.8% to 43.4%, which could affect your previous years’ taxes. Any cryptocurrency valued at more than $10,000 must be reported to the IRS.
Will Leaving the US Absolve Me From Paying Back Taxes?
Several tax attorneys suggest relocating if crypto traders want to avoid IRS clampdowns and keep most, if not all, of their profits. By implementing a properly executed expatriation strategy with a relocation specialist, the first $750,000 in capital appreciation would be tax-free, but you have to act quickly.
Keep in mind that US citizens, regardless of whether they live or work outside of the US, have to pay US income tax unless they renounce their citizenship. It costs $2,350 to renounce your citizenship, but that’s likely much less than what you’d pay in back taxes if you’re audited.
Since you weren’t expected to be audited and want to avoid IRS clampdowns, it’s likely that you won’t have enough cash flow to pay them back. If your situation is dire, it’s recommended that you call an attorney immediately.