Can The IRS Track Cryptocurrency? The Risks Of Tax Avoidance
As cryptocurrencies like Bitcoin, Ethereum, and others have increasingly become part of our everyday lives, they have caught the attention of the IRS. A question on everyone’s mind is – can the IRS actually track cryptocurrency? With the opaque nature of crypto transactions, it may seem like an attractive option for those hoping to keep their financial activities under the radar.
However, using cryptocurrency for tax avoidance purposes is a risky endeavor, and it’s crucial to understand why. Here’s what you need to know.
The IRS Is Actively Developing Their Crypto Tracking Abilities
The first thing to note is that the IRS is actively working on improving its ability to track cryptocurrency transactions.
In fact, they’ve recently started asking taxpayers directly on their tax returns if they have conducted any cryptocurrency transactions. If you want to learn more about how the IRS is addressing cryptocurrency, it’s worth noting that they have issued several pieces of guidance over the years to provide clarity to taxpayers about the tax implications of cryptocurrency transactions.
This is a clear signal that the IRS is not only paying attention to cryptocurrency but is also becoming more adept at understanding and tracking it.
Blockchain Analysis Companies Are Helping Government Agencies
Blockchain analysis companies, such as Chainalysis, Elliptic, and CipherTrace, are often employed by government agencies to assist in identifying and tracing cryptocurrency transactions.
These companies use sophisticated technology to track the movement of cryptocurrency through the blockchain. If someone were to use cryptocurrency for illicit activities, including tax evasion, these companies could potentially trace the transaction back to the individual.
Cryptocurrency Exchanges Are Required To Report To The IRS
Most people buy, sell, and hold cryptocurrencies on exchanges. These exchanges, such as Coinbase, Binance, and Kraken, are required by law to report certain information to the IRS, particularly when users buy or sell a substantial amount of cryptocurrency. This information includes the taxpayer’s identification and the amount and nature of the crypto transactions. As such, using exchanges to transact with cryptocurrency does not shield you from the IRS’s scrutiny.
Cryptocurrency Is Taxable Under Current Law
In the eyes of the IRS, cryptocurrency is considered property for tax purposes. This means that selling cryptocurrency for a profit, using it to purchase goods or services, or receiving it as compensation is a taxable event. Failing to report these transactions on your tax return can result in penalties and interest. In extreme cases, it can even lead to criminal charges of tax evasion.
Anonymity Is Not Guaranteed
While cryptocurrencies like Bitcoin were originally touted for their anonymity, the reality is that total anonymity is hard to achieve. Many cryptocurrencies operate on public blockchains, which means all transactions are publicly visible. While the identities of the parties involved are represented by anonymous alphanumeric addresses, patterns of transactions can be analyzed and potentially linked back to individuals.
IRS Has Been Successful In Court Cases
The IRS has already been successful in several court cases involving cryptocurrency. Perhaps the most famous case is that of Coinbase, where the IRS successfully argued that the exchange should hand over information about users who had conducted significant trading activity. This set a precedent and has likely emboldened the IRS to pursue similar cases in the future.
The rise of cryptocurrency has given birth to a new era of financial possibilities, including the potential for tax evasion. However, as we’ve explored, the IRS is not only aware of this but is also actively developing its ability to track cryptocurrency transactions.
While it may seem tempting to use the perceived anonymity of cryptocurrencies for tax avoidance, the risks associated with such activities are significant. Tax laws still apply to cryptocurrency, and failing to properly report crypto transactions can lead to severe penalties.