Virtual currency lands in the IRS’s crosshairs – part one

virtual currencyThe IRS has grown more interested in virtual currency, even if its value is still erratic. The government began Operation Hidden Treasure, for instance, in 2021. The purpose was to find taxpayers who failed to record cryptocurrency-related revenue on their federal income tax forms.

Additionally, the IRS received $80 billion under the 2022 Inflation Reduction Act, most of which was set aside for enforcement actions. By the end of 2025, the Fiscal Responsibility Act, passed in May 2023, will recoup $21.39 billion. The IRS’s goal to further enforcement concerning digital assets is part of the agency’s strategic operating plan for 2023 through 2031. You must comply with these rules if you buy, sell, or otherwise conduct transactions with virtual money.

What is virtual currency?

Any digital representation of value stored on a distributed ledger with cryptographical security or comparable technology is called a “virtual asset” by the IRS. Convertible virtual currencies, such as Bitcoin, stablecoins, and non-fungible tokens (NFTs), are all examples of this type of currency. Convertible virtual currency is a type of currency whose value links to the value of another asset, such as the value of the U.S. dollar.

Cryptocurrencies, like Bitcoin, are examples of convertible virtual currencies that you may exchange for real money or other digital assets. According to the IRS, they are payments for goods and services traded digitally between users. Cryptocurrencies use cryptography to safeguard transactions recorded digitally on a distributed ledger—blockchain, for example.

IRS enforcement tool

A “John Doe summons” is one tool the IRS may employ to find digital assets. According to the U.S. Department of Justice, taxpayers “may be using cryptocurrencies to hide taxable income from the IRS” since they “can be difficult to trace and have an inherently pseudo-anonymous aspect.” The IRS can learn details about a person’s account by asking a court to issue a John Doe summons and serve it on a cryptocurrency dealer or exchange.

A summons used by the IRS to get a person’s account information from a virtual currency exchange was disputed in one recent instance by the subject. He said it violated the constitution. The IRS’s efforts “fall squarely” within its authority to pursue delinquent taxes, according to a U.S. District Court, which disagreed and made this determination. (Harper, DC NH, 5/26/23)

An evolving area

The IRS’s attention to virtual currency transactions will likely grow due to its recent influx of enforcement funding. We’ll assist you in adhering to all relevant laws and specifications. Do not hesitate to contact our RRBB accountants and advisors with any questions. In the meantime, keep an eye out for part two of this two-part blog series!

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