Cryptocurrency has become an incredibly popular way to invest, but the tax side of this virtual coin can be difficult to navigate. The IRS has viewed it as an attempt by many people to hide earnings and money from the IRS.
In March of 2021, the IRS announced Operation Hidden Treasure to crack down on cryptocurrency reporting. If you’ve bought and/or sold cryptocurrency recently, it’s essential to declare your crypto correctly on your tax forms to avoid tax fraud and tax evasion charges.
Here’s what you need to know.
Before we jump into it, if you know you owe IRS back taxes on your crypto gains, it’s important to reach out to a tax law firm like ours that is skilled in negotiating back tax debt with the IRS. We can help you get back in compliance while potentially negotiating with the IRS on your behalf. Contact us today for a consultation.
What Is Operation Hidden Treasure?
Operation Hidden Treasure is a joint effort by the IRS Civil Office of Fraud Enforcement and its Criminal Investigation Unit (notice that I bolded this for a reason). You can expect in the future that the IRS and Justice Department will be announcing convictions. This operation is designed to search for unreported income from cryptocurrency.
Operation Hidden Treasure has trained agents to examine the blockchain in order to find signs of tax evasion. Blockchain is the digital ledger that tracks your cryptocurrency mining and transactions. IRS agents look for tax evasion signatures which are signs that make it easier to detect further fraudulent activity. An example of a tax evasion signature is “structuring,” which means to literally structure transactions in increments of less than $10,000 to avoid certain reporting requirements. Other examples are the use of “nominees,” “shell corporations,” or “getting on and off the chain.”
Crypto users have tried different ways to skirt reporting requirements, and the IRS is in hot pursuit of unreported crypto. The IRS is also collaborating with European law enforcement agencies to tackle international fraud.
How To Protect Your Assets
The IRS considers virtual currency to be property similar to gold rather than money, and it is taxed accordingly. If your only crypto transaction this year was purchasing crypto with US dollars, then that does not need to be reported, according to Question No. 5 in the IRS FAQ on their website. However, if you sold your crypto or you traded your crypto for any goods or services, then that does need to be reported.
When you sell your crypto, keep track of its value when you purchased it, and its value when you sold it. If you are going to have crypto, then REPEAT AFTER ME: I will keep documents and records to be able to prove the value of my crypto – both when I purchased and sold it and documents that prove what I paid for it when I bought it and what I received when I sold it or bought something with it. (No bad record-keeping, instead hyper-vigilant record-keeping is what you must do.) While crypto and the IRS can both be murky subjects, your transparency is the key to protecting your financial assets from future tax audits. For you to get ready for the upcoming tax season, you need to get your portfolio organized. That is especially critical if you currently own any crypto or owned any crypto in the past year. Operation Hidden Treasure is out there looking under every rock and tax return.
Need Tax Relief?
If you do get in trouble with the IRS and they claim you owe $10,000 or more, reach out to our tax law firm, and we’ll schedule a confidential consultation to explain your options in full to resolve your tax problem permanently.