IRS Adds 87,000 New Agents, More Crypto Tax Enforcement

It’s no secret that the IRS is after crypto tax dollars and for fans of crypto who don’t report or who don’t do it right. The Inflation Reduction Act, which passed the Senate on Sunday, raises taxes and would give the IRS billions to enter what the Wall Street Journal called “beast mode.” In all, the bill would allocate about $80 billion to the IRS for increased enforcement, operational improvements, customer service and system modernization. This $80 billion is more than six times the current annual IRS budget of $12.6 billion. The bill says a whopping $45.6 billion will go to enforcement, which is the main directive from Democrats to the IRS. Get bigger, tougher and faster to collect. Reports suggest the IRS will hire 87,000 new agents, and with $45 billions is disappointed into IRS “enforcement”, change is coming. There’s no set dollar amount to go after crypto, but the new law vaguely says it will specifically pursue “digital asset monitoring and compliance activities,” aside from more general tax enforcement. Think audits, debt collection and worse. The tax authorities also update the forms. There’s already a question about virtual currency at the top of the tax return you’ve filed—or still need to file—for 2021. As we’ll see, that question will be tougher for 2022.

For 2021 returns, the seemingly innocuous question asked: “During 2021, did you receive, sell, exchange or otherwise receive any financial interest in a virtual currency?” The IRS says that all taxpayers who file Form 1040, Form 1040-SR or Form 1040-NR must check one box that answers either “Yes” or “No” to the virtual currency question. The question must be answered by everyone taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021. You can read the IRS reminder here. When it comes to taxes, a simple yes or no question can be a surprisingly big deal – if you get it wrong. But can you tick “No?”

Taxpayers who just owned virtual currency at any time in 2021 can tick the “No” box when they have not engaged in any transactions involving virtual currency during the year, or their activities were limited to: (1) Holding virtual currency in their own wallet or account. (2) Transfer of virtual currency between own wallets or accounts. (3) Purchase of virtual currency using real currency, including purchases using real currency electronic platforms such as PayPalPYPL
and Venmo. (4) Engage in any combination of holding, transferring or purchasing virtual currency as described above.

But many taxpayers must check “Yes.” Here are the most common virtual currency transactions that require checking the “Yes” box: (1) Receipt of virtual currency as payment for goods or services provided; (2) Receiving or transferring virtual currency for free (without giving any consideration) that does not qualify as a bona fide gift; (3) Receipt of new virtual currency as a result of mining and staking activities; (4) Receipt of Virtual Currency as a result of a hard fork; (5) An exchange of virtual currency for property, goods or services; (6) An exchange/trade of virtual currency for another virtual currency; (7) A sale of virtual currency; and (8) Any other disposition of an economic interest in virtual currency.

For 2022 tax returns, the IRS has changed the crypto question on Form 1040. A draft IRS Form 1040 for 2022 now reads:

• “At any time during 2022, have you: (a) received (as a reward, prize or compensation); or (b) sold, exchanged, gifted or otherwise disposed of a digital asset (or an economic interest in a digital asset)?”

This casts the net wider than the previous version. In general, IRS gift and estate tax professionals are different from IRS income tax professionals. But the expansion of the crypto tax issue can only herald more to come, more crypto audits, more IRS scrutiny of crypto and crypto taxpayers, and more money being poured into IRS compliance in general. Be careful out there.