Cryptocurrency is creating a buzz and growing exponentially. It also presents a whole new frontier of challenges that involve paying taxes. Tax clients are failing to report digital transactions because either they are unaware of the regulations or are intending fraud.
Cryptocurrency is still relatively new, and along with its growth, the IRS is molding protocols, providing information, and using data analytics to maintain transparency and collect revenues fairly. The IRS has buckled down with rules and is determined to track down tax cheats.
Accounting and finance firms should take this golden opportunity and revamp themselves with updated protocols and innovative technology to handle complex situations with clients. The IRS demands full disclosure of virtual currencies.
With the growing ecology of cryptocurrency and harsh scrutiny from the IRS, CPAs will need to be prepared and step up their game.
- The value of virtual currencies can undergo fluctuations overnight, and there is no stability, for example, Bitcoin. CPAs should be prepared to handle tricky questions from potential investors and part advice with caution as there is some level of risk involved.
- In January 2019, The CPA journal article “The Taxation of Cryptocurrency” rightfully predicted that the IRS thoroughly inspects all cryptocurrency transactions. They now require taxpayers to indicate on 2020 1040 if they hold any virtual currency.
- The IRS will treat virtual currencies like bitcoin the same as property and taxed just like real property and stocks.
- The government is losing about a trillion dollars every year in unpaid taxes, and the tax gap keeps getting wider. The White House has joined forces with the IRS to track down tax dodgers and recover outstanding dues in regular and crypto tax.
- The IRS announced in 2019 that they would send letters to people who failed to report or disclose their crypto income. The warning is to be taken seriously, and individuals must take action within 30 days or risk having their tax profile examined.
- The IRS has partnered up with TaxBit, an analytic data company that uses software to inspect cryptocurrency wallets and monitor crypto transactions. They are also training IRS agents to use the software and detect tax cheats and non-payers.
- “Operation Hidden Treasure” is an initiative taken by the IRS Office of Fraud Enforcement that comprises a team of IRS criminal investigation professionals. They focus on taxpayers who neglect to report cryptocurrency income from their tax returns.
- Taxpayers need to understand the dire consequences of underreporting virtual income and realize that the transactions are not secret and can be traced. Taxpayers can no longer plead ignorance as the cryptocurrency tax obligation is the first question when filing their tax returns.
- CPAs should understand all the IRS compliance obligations and take initiatives to help clients by using technology tools like Legible Tax Pro to manage all their accounts and calculate and identify taxable transactions.
Skilled CPAs who are prepared to advise clients and represent them in crypto audits are very much in demand today.
To match the level of the trained IRS staff, it is imperative for CPAs to also train in blockchain analysis and analytic tools to support their clients in audits successfully.
CPAs should be well-rounded in crypto tax planning, audit defense, and provide valuable advice to clients.