Tax Justice for Krypto Customers: The Fast and Obligatory Want for an Amnesty Program
The United States Internal Revenue Service is blinded by its desire to defeat cryptocurrency. It rushes to enforce without first thinking how best to get there. It has spent millions of tax dollars training its staff and sourcing private contractors to expose non-compliance by crypto users. The IRS is equipping its people to aggressively enforce cryptocurrency tax laws. "Established" frameworks are ignored in order to achieve compliance with tax regulations and the collection of crypto transactions.
Crypto tax amnesty is the easiest and fairest way to get from point A to point B. However, the IRS prefers unfair and aggressive tactics that disproportionately affect a population of taxpayers – the young.
This framework, a well-known amnesty program, began over 10 years ago. There is already a fine blueprint that will follow. In March 2009, the IRS announced a foreign tax amnesty program called the Offshore Voluntary Disclosure Program (OVDP). The program was in response to US taxpayers not disclosing their overseas bank accounts or reporting billions in taxes on foreign income. In return for voluntarily disclosing and paying taxes, the OVDP offered taxpayers the opportunity to avoid criminal prosecution and pay far fewer fines (sometimes none at all). Without the OVDP, taxpayers faced jail sentences and a host of draconian civil sentences. The program was a huge success – around 15,000 claims were submitted in just seven months, generating nearly $ 3.5 billion in taxes, penalties and interest.
Given the usefulness of OVDP, the IRS added several iterations to the program. In total, around 56,000 taxpayers came forward, and the IRS raised more than $ 11 billion in taxes, interest and penalties. Even the worst forecaster could predict a similar outcome using a crypto tax amnesty program. Consider this: there is a $ 25 billion crypto tax gap, nearly 37 million Americans now own some form of cryptocurrency, and the compliance rate is only around 50%.
The tax gap is large enough, the population is numerous, and the compliance rate is grim. For this reason, the crypto tax amnesty could provide far more information than the OVDP and bring in a lot more tax money. The similarities are obvious, but a few key differences further favor the crypto-amnesty.
Crypto User Demographics
The first difference is in the demographics of the crypto users. Almost 60% of Bitcoin (BTC) users are under 35, of which 17% have barely graduated from high school and are currently in their early twenties. This is important as this demographic is by far the least experienced group of taxpayers. Unlike taxpayers who transact overseas, Millennials are the least likely to recognize the nuances of reporting capital gains and losses, limiting capital losses, disallowing capital expenditures, transfer losses, the reinforced base, the transfer base and adjustments to the base. and the list goes on and on.
Despite this inexperience and youth, the IRS refuses to offer a tax amnesty program to krypto users. Instead, the IRS offered tax amnesty to a much more experienced group of taxpayers doing overseas transactions. These taxpayers are much more likely to understand the nuances of tax law and employ tax lawyers and CPAs. They're more common tax evaders, while crypto outliers are often unintentional. Even so, the IRS ruthlessly targets the least experienced population.
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There is more injustice beyond the simple population. Foreign Bank Accounting Reporting (FBAR) is a fundamentally solid area of tax law, but taxation of cryptocurrencies is not. Fairness dictates that amnesty should be offered based on the simple fact that the taxation of cryptocurrencies is often misunderstood and represents a new and emerging area of tax law. The rules are not well established and the current IRS guidelines are just two IRS notices and a number of Frequently Asked Questions (FAQs), by the way, none of which is legally binding on the IRS. That said, a crypto taxpayer cannot legally rely on them. Until legally binding guidelines are published and the rules better developed, crypto tax amnesty is the fairest solution.
Crypto demographics are further hampered by the fact that reporting of third party crypto transactions is virtually non-existent (only two of the nine US-based cryptocurrency exchanges have published guidelines on transaction reporting). In other contexts, taxpayers can rely on annual 1099s or brokerage slips to report their base and capital gains or losses. This is not available to most taxpayers in their twenties who are making cryptocurrency transitions and are likely only used to simple W-2 tax returns. Rather, they need to sit down with pencil and paper and track spot prices (with no NYSE to rely on), find fair market values, adjust their base, and calculate their profits and losses on multiple exchanges at different times with different fees.
Crypto tax forms
Coinbase, one of the largest and most popular exchanges, has just switched from issuing 1099-K forms to 1099-MISC forms. This is important in that the reporting thresholds for the latter are much lower. Forms 1099-K are required to report if the taxpayer exceeds 200 transactions or a threshold of $ 20,000. In contrast, 1099 MISCs are issued when a taxpayer receives more than just $ 600 in payments during the year. Due to lower thresholds, tens of thousands more taxpayer names are now made available to the IRS – all without any indication of the basis. Until the reporting of cryptocurrency by third parties matches other capital transactions, crypto tax amnesty is the fairest solution.
Or worse, some young taxpayers may get paid in cryptocurrency, or buy and sell products in cryptocurrency. In this case, they need to calculate a reasonable FMV for the cryptocurrency that changes hands at different times – keeping track of its base in the process. It's not hard to imagine a young taxpayer keeping a constant record of the cryptocurrency received for services rendered or goods exchanged and making different FMV adjustments at different times across multiple exchanges.
If a person receives Bitcoin in exchange for selling a video game on Day 1 and receives Bitcoin on Day 2 for selling sunglasses, they must calculate the FMV of Bitcoin earned at various intervals minus the base with a solid value understanding the implications the self-employment tax and the need to pay estimated taxes. The young taxpayer's logbook can compete with that of a long-haul truck. The missteps here are manifold, and crypto tax amnesty is the fairer solution, much fairer than crypto-based self-employed tax audits.
To add salt to the sore, there is as yet no IRS de minimis rule on crypto transactions that involve even the smallest purchase of property. The young taxpayer could arguably make a capital gain by buying a pack of chewing gum with XRP (a pack of chewing gum costs $ 1.50 and Ripple is around $ 0.50). Because he received a value beyond the XRP he paid, he has a capital gain. In this regard, the current IRS regime is on the verge of absurdity.
Finally, the IRS guidelines on cryptocurrency taxation don't mention penalties for violations, while the FBAR guidelines are laden with discussions about penalties. Until a reasonable de minimis exception is enacted and the IRS adequately informs young crypto users of penalties for non-compliance, crypto tax amnesty is the fairest solution.
The Taxpayer's Bill of Rights
The Taxpayer's Bill of Rights addresses this issue of injustice and calls for amnesty wholeheartedly.
The right to be informed says:
“Taxpayers have the right to know what to do to comply with tax laws. You have the right to clearly explain the laws and IRS procedures on all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions regarding their tax accounts and to receive clear explanations about the results. "
The right to a fair and just tax system says:
"Taxpayers have the right to expect that the tax system takes into account facts and circumstances that may affect their underlying liabilities, their solvency or their ability to provide information in a timely manner."
The IRS hits its load with FBAR, but fails miserably on its cryptocurrency tax policy. It attacks the least experienced taxpayer but rewards the most experienced. It warns the most experienced taxpayers of penalties but leaves the least experienced guesswork behind. It ignores the fact that third party reporting doesn't give young taxpayers a quarter. It imposes complex tax nuances on the simplest of the population and ignores the stupidity of checking that gum pack.
Crypto tax amnesty got little attention because it doesn't affect the right people – it's a young person's tax problem. Big banks and big corporations took care of reporting foreign bank accounts and a tax amnesty program came into being, but crypto users don't have centralized support to support them. In fact, their existence is based on decentralization. Unfortunately, a crypto tax amnesty is unlikely until the “right” people are affected. But if institutional integrity matters, the IRS should expand the olive branch – regardless of the lack of big hitters.
With all due respect, the IRS Commissioner is opening the borders and offering amnesty to this flood of young taxpayers. A fair and just tax system demands it.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jason Morton practices law in North Carolina and Virginia and is a partner at Webb & Morton, PLLC. He is also a judge attorney in the Army National Guard. He focuses on tax defense and tax disputes (domestic and international), estate planning, business law, asset protection and cryptocurrency taxation. He studied blockchain at the University of California-Berkeley and law at the University of Dayton and George Washington University.