As another tax season arrives, one of the major questions crypto holders have is how does the IRS know if someone has cryptocurrencies.Before I describe the ways that the IRS knows about your crypto holdings, note that the US tax system relies on a voluntary compliance system.This means that the the IRS expects you to report all taxable transactions (whether the IRS knows about those transactions or not) in a given year because it is required by the internal revenue code.Failure to do so may carry hefty penalties.While keeping that thought in mind, let’s dive into 3 ways the IRS may find out about your crypto holdings.1099-K & 1099-B If you receive a Form 1099-K or Form 1099-B from a crypto exchange, without any doubt, the IRS knows that you have reportable crypto currency transactions.
This is thanks to the “matching” mechanism embedded in the IRS Information Reporting Program (IRP).Here is how it works.
During any tax year, if you have more than $20,000 proceeds and 200 transactions in a crypto exchange, you will get a Form 1099-K indicating proceeds for each month.The exchanges are required to create these forms for the users who meet the criteria.A copy of this form is provided to the account holder, and another copy goes to the IRS.
If you file a tax return and do not include these amounts, the IRS computer system ( Automated Underreporter (AUR) ) automatically flags those tax returns for under reporting.This is how you get tax notices like CP2000.If you receive a Form 1099-B and do not report it, the same principles apply.
Likewise, Coinbase, Kraken and other US exchanges do report to the IRS.Therefore, if you receive any tax form from an exchange, the IRS already has a copy of it and you should definitely report it to avoid tax notices and penalties.
Subpoenas Over the past few years, the IRS has issued subpoenas to several crypto exchanges ordering them to disclose some user accounts.
For example, in 2018, Coinbase had to disclose approximately 13,000 user accounts including taxpayer identification number, name, birth date, address, records of account activity, transaction logs and all periodic statements of account or invoices (or the equivalent) pursuant to John Doe summons.On another occasion, the IRS subpoenaed Bitstamp to release more information about a taxpayer who filed an amended return and requested a $15,475 refund.
Schedule 1 Virtual Currency Question Starting 2020 tax season, on Schedule 1 , every taxpayer has to answer at any time during the year whether you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency (Cryptocurrency question).
This is an extremely broad question and will require you to check “yes” even if you are just holding crypto in an exchange or wallet.If you mark “yes”, first & foremost, it would signal the IRS to check various forms & schedules of the return for cryptocurrency gains & losses.However, everyone who marks “yes” may not have a reportable taxable event.For example, during 2019, if you just held bitcoin and did not sell, you would not have any taxable amount to report.In these cases, the IRS will use the cryptocurrency question as a way to gather data about US crypto holders and keep an eye on future years for taxable events.
These are some ways the IRS knows that you have bitcoin and potentially owe crypto taxes.The US tax system is voluntary, and it is your responsibility to report all transactions whether the IRS knows about it or not..
