A tax expert is warning that filing crypto taxes is a must in order to avoid penalties, as the taxman knows you’ve got reportable transactions.
This comes as the Internal Revenue Service (IRS), the service of the United States federal government responsible for collecting taxes, is officially permitted to seek the names of high-value customers of crypto financial services firm Circle, while it also wants the same from crypto exchange Kraken.
The IRS knows users have reportable crypto transactions via their “matching” mechanism embedded in the IRS Information Reporting Program (IRP), he said in an earlier post. Furthermore, the exchanges are required to create appropriate tax forms for the users who meet the criteria.
Chandrasekera concluded that,
“Therefore, if you receive any tax form from an exchange, the IRS already has a copy of it and you should definitely report it to avoid tax notices and penalties.”
The IRS is now seeking the records of American citizens who engaged in business with or through the US-based Circle. More precisely, the IRS wants information about US taxpayers who conducted at the minimum the equivalent of USD 20,000 in transactions in crypto in the years 2016-2020.
Per a Department of Justice press release, on April 1, a federal court authorized the IRS to serve a ‘John Doe’ summons on Circle, “or its predecessors, subsidiaries, divisions, and affiliates,” and this includes crypto exchange Poloniex. The exchange was acquired by Circle in 2018, but sold in 2019.
Per IRS, a Jon Doe summons is one that doesn’t identify the person with respect to whose liability the summons is issued, but “allows the IRS to obtain the names, requested information and documents concerning all taxpayers in a certain group.”
The petition, therefore, doesn’t allege that Circle has engaged in “any wrongdoing,” said the press release, but asks the company to produce records identifying the US taxpayers which the IRS finds “may have failed to comply with any provision of any internal revenue laws,” as well as other documents relating to their cryptocurrency transactions.
The IRS issued guidance regarding the tax treatment of virtual currencies in IRS Notice 2014-21, stating that virtual currencies that can be converted into fiat are property for tax purposes. In the court’s order, the judge found that “there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.”
Meanwhile, on March 30, a petition for leave to serve a John Doe summons on Kraken was filed as well, seeking the same as in Circle’s case.
In November 2016, a judge approved the John Doe summons on major crypto exchange Coinbase, which fought the order, but finally had to comply in late 2017, handing over the records for some 14,000 customers.
In January this year, the IRS released a new version of its draft instructions that clarify the definition of virtual currency and guide individual taxpayers on how to fill in the required 1040 form.
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