The temptation for cryptocurrency investors to not report gains is strong considering the IRS has a poor track record of catching cryptocurrency tax evaders. Only 802 people reported cryptocurrency gains or losses in 2015, which is even 91 less honest filers than the year before.
The temptation to not report gains is possibly even stronger among small time investors since the IRS is currently only seeking information on accounts that engage in transactions worth over $20,000 according to this court filing.
What will be interesting to watch will be how crypto traders respond to the IRS catching on to tax evasion in the coming years. And the IRS is catching on: (1) The IRS is suing its first cryptocurrency exchange platform (Coinbase) to provide information on US citizens, and (2) the IRS is using blockchain software program Chainalysis to track and catch tax evaders.
With the IRS sharpening up, will we see more filers volunteer honest tax returns to avoid getting caught with penalties and interest? Or will people invest through cryptocurrency exchanges that the US doesn’t have jurisdiction over, and perhaps even invest in coins specifically encrypted for anonymity?
They say cryptocurrencies are the new tax haven for tax cheats. It took a while for the IRS to force banks in Switzerland and the Cayman Islands to come clean with US citizens’ accounts. How much longer will it take the IRS to catch on in the digital world of cat and mouse?