Few crypto gains appear on tax returns. That's changing — but not … – The Washington Post

Few crypto gains appear on tax returns. That's changing — but not … – The Washington Post

Blockchain Crypto Market Technology
December 31, 2022 by Coinvasity
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Sign inFor more than a decade, the number of people buying and selling cryptocurrency grew and grew. Tax revenue from earnings on sales of those investments? Not so much.More than 5 million people were trading crypto between 2014 and 2015, but fewer than 1,000 taxpayers per year reported earnings from those trades on their tax
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For more than a decade, the number of people buying and selling cryptocurrency grew and grew. Tax revenue from earnings on sales of those investments? Not so much.
More than 5 million people were trading crypto between 2014 and 2015, but fewer than 1,000 taxpayers per year reported earnings from those trades on their tax returns in that period, according to estimates by federal prosecutors and the most recent public tally by federal authorities. They note that the number of people reporting income from crypto has increased since then, but not even close to enough.
Coinbase alone had 103 million users in 2022, a company spokesperson said, with 8.5 million of them making trades every month, although the company will not disclose how many are in the United States.
The amount of revenue not collected is hard to calculate, given the purposely anonymous nature of cryptocurrency and the IRS’s own opacity — it has not revealed publicly the number of people paying capital gains on crypto investments in more than five years. But the Congressional Budget Office estimates that a new reporting requirement for the exchanges will result in $28 billion in taxes collected over the decade after it takes effect in 2024. A legal requirement that failed in Congress this month would have generated $16 billion more by banning a legal loophole called “wash sales” for crypto traders. Unlike traditional investors, they can book a paper loss when prices drop and immediately re-buy the asset.
“People can play games with [cryptocurrency] and not have to pay any taxes. It’s incredibly unfair to the vast majority of law-abiding taxpayers when the IRS is crippled,” said Edward Zelinsky, a tax law professor at Cardozo School of Law who has written critically about cryptocurrency. “I think that’s the problem with bitcoin — the tax evasion has become normatively accepted.”
Although cryptocurrencies brand themselves, as the name suggests, as currencies like the national coin of a country, the IRS considers them to be more akin to shares of a stock or a similar tradable asset. Federal regulations say that when investors buy bitcoin or other digital currencies, then later sell them for higher prices, they should pay capital gains taxes on the money they make, just as they would if they made money in the stock market.
But at least 40 percent of people who own cryptocurrencies do not know they have to report certain types of earning, according to a survey by the company CoinTracker, whose purpose is helping its 1.7 million customers report their crypto gains or losses on their tax returns, CEO Jon Lerner said.
“There’s a lack of awareness,” Lerner said. “Compliance rates are, I think, still a fraction of investors.”
In 2020, the IRS started explicitly asking about cryptocurrency on individual tax returns, with a yes or no question on every taxpayer’s return about whether the taxpayer acquired or sold any virtual currency that year. Saying yes did not mean the taxpayer necessarily owed any taxes on that digital transaction. Only 2.3 million taxpayers said yes.
When it comes to stocks and other traditional investments, investors know they have to pay capital gains taxes and follow through because every traditional brokerage each year must send its customers — and the IRS — a tax form, called a 1099-B, showing customers’ gains and losses. Authorities would know if a taxpayer failed to report those earnings.
Crypto traders are just as legally bound to pay taxes on their gains, but cryptocurrency exchanges have not been required to send those forms and won’t be required until the provision in the infrastructure bill takes effect in 2024. Without the forms, the IRS has had no way of knowing what those gains are short of going to court.
“That certainly will be a huge amount of reporting — and presumably increase in revenue,” said Joseph Riley, a New York tax lawyer who has focused on cryptocurrency, because taxpayers will “know that a copy has gone to the IRS.”
Crypto traders still get one loophole: wash sales, which allow them to sell to book a loss but immediately re-buy the same asset. Congress declined to ban them this month, even after recent revelations that the now-bankrupt exchange FTX legally took $4 billion of tax deductions using the loophole.
Lin William Cong,a Cornell University business professor and part of a research team that found that crypto traders avoided as much as $16 billion in taxes in 2018 using the strategy, said the new reporting requirements might increase its use.
“Since they have to comply anyway, they may as well use their crypto trading to do tax loss harvesting,” he said.
In response to the new reporting requirements, crypto exchanges asked the IRS many logistical questions about how exactly they should report transactions, which can differ from traditional investments in some ways. For instance, crypto traders can move digital assets in and out of their own private wallets, making it easier to avoid having all of their transactions reported to the IRS by a brokerage. The agency issued an announcement last week promising that draft regulations are coming.
Until they do, reporting won’t begin.
“Defining rules takes time, effort and investment, and that’s not something the IRS has had an abundance of in the past 10 years,” said Lawrence Slatkin,the vice president for tax at Coinbase. “We’re seeing a delayed reaction.”
Federal prosecutors have started looking for major tax cheats who are using cryptocurrency, going to court to procure records from Coinbase, SFox and others to identify large crypto investors who have not reported gains. Lerner, of CoinTracker, predicted more such actions, including for prior tax years.
“That’s not being done at scale yet, but we expect that to change in the next few years as the government is cracking down on this problem,” Lerner said. Just because your name is not publicly attached to your cryptocurrency trades doesn’t mean that the IRS can’t come after you.
“Any time you’re transacting on any centralized place that can exchange, [the IRS has] the authority to be able to get that data,” he said. “In terms of the misconception that it’s easy to get away with these things in crypto, it’s actually pretty far from the truth.”

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