An Insider's Perspective on IRS Crypto Tax Enforcement
In a wide-ranging BitcoinTaxes podcast, cryptocurrency tax controversy attorney Alex Kugelman delivers insights into the Circle/Kraken/Poloniex Summonses, the June 2021 Like-Kind Memo, and IRS enforcement of DeFi.
Alex and his frequent collaborator on criminal tax issues, Chris Wadja, had a roundtable discussion with host Salvatore Vescio to breakdown the increased IRS focus on ensuring tax compliance of cryptocurrency users.
A federal court has ordered Kraken exchange to provide account information to the IRS pursuant to a "John Doe" summons. The IRS sought information about U.S. taxpayers who conducted at least $20,000 in transactions on the exchange from 2016 through 2020.
The Kraken summons follows another federal court ruling authorizing a similar summons of crypto exchange Circle and Poloniex for users who also conducted $20,000 or more in transactions for the same years.
This is a follow up from the epic battle between Coinbase and the IRS, and Wajda said using a John Doe summons is not something that can be issued flippantly.
"The IRS had to establish there is non-compliance within the industry," Wajda said. "What the government does not have is the identity of public keys that is on the blockchain that identifies the taxpayer and the taxable events to help ensure compliance within the cryptocurrency world."
The IRS cybercrime unit is quite proficient in chain analysis and software used is extremely powerful, according to Wajda, citing the $1 billion crypto seizure from the Silk Road administrator. Wajda would know as a former special agent in charge of the IRS Criminal Investigation division and current Managing Director of Black Raven Advisory Group who knows all the ins and outs of the criminal investigation procedures.
"Chain analysis is not that tough but what is tough is the government does not have all the identities of public keys on the blockchain," he said. "These summonses provide a tremendous amount of value to identify holders of public keys on the blockchain because that information is what is missing to ensure compliance amongst taxpayers."
If you have a brokerage account and you buy and sell stocks, the brokerage firm must report the 1099-B Form to the IRS showing basis, gross amount of sale, commission, and other information necessary to determine capital gain or loss from stock sales. That is similar to what the IRS is seeking from the crypto exchanges.
"These exchanges are not going to put up a fierce fight because it’s costly, unlikely to prevail, and they don’t want to poke the IRS bear," Alex said. "So, there is going to be a tremendous amount of data released connecting U.S. taxpayers to that information. If there is nothing on your tax return regarding your crypto activity and the IRS now holds that information, then like the Coinbase summons of 2018 there are going to be many tax return audits and even criminal investigations."
This is where Kugelman Law cryptocurrency attorneys can help with tax compliance.
Our team of attorneys and accountants will identify the scope and analyze the information reported on your tax return to determine compliance, address any potential non-compliance issues, and amend any prior tax returns to accurately report gains and losses, if necessary.
For missing records or accounting, our CPAs use proprietary, cutting-edge software to recreate your activity and reconstruct incomplete or missing financial records. The improved documentation has helped make Kugelman Law a standout firm in cryptocurrency cases.
For any potential audit or criminal investigation, a Kugelman Law crypto attorney can act as your representative and interface with the IRS on your behalf.
If you are a Kraken, Circle, and/or Poloniex user who conducted more than $20,000 in transactions – regardless of gains or losses – from 2016 through 2020, then it is important you contact a Kugelman Law tax attorney today to review any compliance issues.
Episode segments focus on the following topics:
· Complying with the June 2021 Like-Kind Memo
· IRS Tactics to Enforce Compliance (Summons, Blockchain Analysis, etc.)
· The Increased Ease of Tracking Crypto Transactions
· IRS Enforcement of DeFi