The IRS wants to get tougher on the 8 percent of Americans who have ever invested in cryptocurrency.
Last summer the agency sent audit notices to 10,000 taxpayers who had potentially failed to report their crypto holdings and pay taxes on them. In October it issued updated guidance on the tax treatment of cryptocurrencies. And in December it released a new form for the 2019 tax season asking if at any point last year, and by any means, filers acquired "virtual currency."
"This is a really broad question," said Daniel Winters, president of Global Tax Accountants, a Bridgewater, N.J.-based provider of international and bitcoin tax services. "If you receive crypto it doesn't mean you have income, maybe it just means you transferred from one wallet to another. Did you send it? Same thing — There's no income due because it's no different than if I take $50,000 from one bank account of mine and transfer it to another."
There are going to be a lot of crypto investors reporting their activity to the IRS for the first time this tax season – or at least there should be, according to the IRS, which has said 12 million American adults hold some amount of cryptocurrency. Winters says that figure can't be right.
"That has to be vastly overinflated," he said. "There's a very active community, there are people who have done incredibly well in the new crypto economy. But I don't think that that 8 percent figure is accurate."
Winters said he has been filing crypto tax returns since 2015.
It's also difficult to determine how many people hold cryptocurrency and what constitutes holding, he added. The number of active crypto investors, people who transact on at least a weekly basis, is small compared to the number of wallets that might ever have been created — so many of which probably hold no more than a $20 test transaction made by people who lost interest in crypto and abandoned them.
Nevertheless, crypto reporting is very much on the radar of the IRS. The 10,000 letters sent last summer were a result of a 2016 case in which the IRS ordered Coinbase to turn over the records on its 14,000 users between 2013 and 2015 who had bought, sold, sent, or received at least $20,000 of bitcoin in a given year. At the time, fewer than 1,000 taxpayers had reported cryptocurrency holdings on their taxes.
Hence the new question on individual tax returns: "At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"
Even if you only bought $50 on Coinbase, you need to answer yes to this question, Winters said.
"It's a very invasive question," he said. "Acquire financial interest in a virtual currency – it basically just means you bought it. I can't evaluate anyone's risk level; what I can tell you is there's no minimum threshold for reporting transactions."
Although, the IRS cares much more about income from cryptocurrency rather than purchases of it. There isn't any income to report on those crypto purchases until the person sells it.
"With the new rules, even if you didn't sell any coins you are required to report what you did," said Chandan Lodha, co-founder and chief operating officer of CoinTracker.
"Before it was just if you had a disposal event of cryptocurrency that you had to worry about taxes," Lodha added. "Now, even if you just touched it – even if you just received it, even if you're a hodler – all of those people who have touched crypto at all in 2019 will be responsible for accounting for cryptocurrency in their taxes. The number of people that will be affected will be significantly more this season."
Based on offerings in the market and IRS numbers, Lodha expects less than 1 percent of Americans are crypto tax compliant.
"If the taxpayer doesn't answer the question and later it's found that they have transactions, the IRS will come back and say 'You didn't disclose,' and that will be a factor in the audit, and not in a good way," said Winters.