It took the IRS years to issue any guidance related to cryptocurrency or virtual currency but in recent years a flood of guidance has come out and enforcement has stepped up in a major way.
In 2019 the IRS made it clear that virtual currency enforcement was one of the three areas of potential tax abuse they were going to vigorously pursue. The pandemic certainly put a dent in those efforts, but enforcement is again ramping up now in 2021.
The IRS published Revenue Ruling 2019-24 in October and updated their FAQ to clear up many of the outstanding questions about how virtual currency transactions should be taxed. There was also a new question added to individual tax returns asking whether any virtual currency had been received, sold, exchanged, or otherwise acquired. This question remained in 2020, and for 2021 it appears the question is being tweaked a little bit and the location of the question is being moved. This virtual currency question now appears directly below the address on a 1040. That’s prime real estate on a tax return right at the top of the return’s first page which shows how serious the IRS is going to be about enforcement.
A wave of IRS letters went out to individuals suspected of owning virtual currencies with varying levels of assertiveness encouraging people to report all of their activity. You can read more about the taxation of virtual currency transactions HERE.
Especially with the dramatic rise in virtual currency prices and the accessibility of trading virtual currencies which occurred in early 2021 this is a growing issue and many taxpayers don’t know what they have gotten themselves into.
Recently in 2021 there is news of dramatic changes to virtual currency reporting by brokers or exchanges which would create a 1099 reporting requirement. This would definitely be a game changer in terms of the IRS ability to enforce the existing laws and will create major headaches for individuals, businesses, brokers, exchanges, or anyone who is transacting in the virtual currency world.
The 1099 reporting is not going to be very accurate given the complexity of the rules so it’s going to leave a large space for taxpayers to need to correct or rebut the information on the 1099 to get a proper tax treatment. Stay tuned to see what the final rules end up being, but it’s very clear that IRS enforcement of virtual currency is a major revenue raiser, so I do expect to see it featured prominently in some fashion in 2021 and 2022 legislation.