IRS warns crypto holders: dodge tax and we'll hand out stiff punishments

Watch out, crypto-heads – the taxman cometh. The Internal Revenue Service has begun mailing more than 10,000 letters to cryptocurrency holders warning of stiff penalties if they fail to report income or pay tax on crypto transactions.
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The service is sending out three variations of one letter, depending on the information it has on the recipient, reported the Wall Street Journal.

One version asks recipients to sign a statement declaring, under the penalty of perjury, that they are in compliance with tax rules that treat digital currencies like bitcoin as investment property akin to stocks or real estate.

“Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency, including increased use of data analytics,” said the IRS commissioner, Chuck Rettig.

The list of names appears to come from a database containing 13,000 accounts holders who have bought, sold, sent or received digital currency worth $20,000 or more between 2013 and 2015.

Coinbase, a digital currency exchange, handed the database over to the IRS in March 2018 under a federal court order. Although the IRS has declined to reveal if the recipients stem from information obtained from Coinbase, the service has previously indicated its belief that few cryptocurrency investors appear to be paying taxes due on sales.

Tax lawyers have told clients that threats to bust cryptocurrency holders for tax evasion should be taken seriously. Since 2009, more than 56,000 Americans who hid money in offshore accounts have paid more than $11bn to resolve tax issues.

William Perez, a tax accountant at the online tax filing and advisory service Visor, told the Guardian last year he had noticed that accountants are often unwilling to familiarize themselves with crypto-accounting rulings.

“Among crypto-investors, I see resistance to reporting it,” he says. “Then there’s another group who’ve got a 1099 [tax form] from Coinbase but they don’t know what it means.”

The IRS criminal investigations chief, Don Fort, has said the IRS plans to make public criminal tax-evasion cases involving cryptocurrency.

After a meeting of the international Joint Chiefs of Global Tax Enforcement (J5) in June, Fort warned that the J5 group had “found innovative ways to tackle these problems, remove barriers, and develop processes” to tackle crypto-crime.

“It is not a good time to be a tax criminal on the run. Your days are numbered,” Fort added.