The Internal Revenue Service (IRS) is embarking on an exercise to ensure that crypto investors pay their fair share of taxes from crypto gains.
The crackdown is also part of a collective effort by US lawmakers, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to strengthen their oversight of crypto trading.
As the cryptocurrency industry grows and investors profit from it, the government seeks to collect taxes from the revenue generated.
However, the effort has not yielded much result, hence the renewed effort by the IRS to ensure maximum compliance.
The IRS is cracking down on crypto tax evaders
To ensure that cryptocurrency investors pay taxes commensurate with their investments, tax authorities are requesting information about crypto investors from crypto investment platforms such as Coinbase as part of a crackdown on crypto tax evaders.
In August 2022, the IRS sought information about customer information from SFOX Inc., a cryptocurrency dealer.
Bloomberg reports that the regulator asked a New York court to subpoena SFOX and its partner MY Safra Bank with the goal of obtaining account and transaction records for users with cryptocurrency transactions over $20,000 in any year from 2016 to 2021.
The court has served a similar subpoena seeking user information from top US crypto exchanges Kraken and Coinbase, as well as Circle Internet Financial.
Why the tax authorities crack down on tax evaders
According to Bloomberg, multinational bank Barclays PLC released a report in May 2022 indicating that crypto investors are not meeting up to half of their crypto tax obligations. This could have served as a wake-up call to the IRS to follow up on crypto investors more closely.
The government says SFOX alone has over 175,000 users who have generated $12 billion in transactions since 2015.
The number is small compared to the number of users and their transaction volume on major crypto trading platforms such as Kraken and Coinbase, which are among the top crypto exchanges in the US.
A major obstacle to effective crypto tax collection is the privacy of crypto transactions. This makes it difficult or even impossible to track cryptocurrency transactions and obtain information such as the user, the cryptocurrency used and the amount transferred unless the investment platform or crypto exchange discloses such information.
The IRS must now seek court orders to compel such platforms to disclose the transaction details of their customers to enable the IRS to perform its duties effectively.
What does this mean for crypto investors?
One of the most famous features of cryptocurrencies is the ability to use them for transactions without anyone knowing who is behind the transaction. However, the government does not like this as it means they cannot extract taxes on transactions and investments.
Furthermore, the United States does not have a clear regulatory framework for the cryptocurrency industry, a large part of which is native to the country. With the government interested in tracking crypto gains, their continued determination to ensure that crypto investors account for their earnings appears to be paying off.
This is since courts are now ordering crypto investment and trading platforms to provide user information for the sole purpose of enforcing tax transfers.
The IRS has provided tools that investors can use for easy voluntary tax filing, but apparently this does not work. Consequently, going forward, crypto investors will be forced to pay the proper taxes as the government explores ways to circumvent the privacy of crypto transactions.
IRS determined to collect crypto taxes
From the steps taken by the IRS, it is clear that the agency is determined to succeed in forcing crypto investors to pay taxes properly.
For most investors this may come as a big shock as they have enjoyed profiting from the industry for years without having to pay taxes or at least pay less than what is expected of them.
