The IRS issued a tax warning. Is paying taxes a necessary step for cryptocurrency to become legal?

Source: Firebird Finance, Author: Jessie

The U.S. Internal Revenue Service (IRS) has begun sending a new batch of letters to cryptocurrency holders, asking them whether they are filing their taxes correctly.

The letter reads: "We understand that you have one or more accounts containing virtual currency, but may not have properly reported your transactions involving virtual currency, including both cryptocurrency and non-crypto virtual currency." The letter also states that if you fail to properly file your crypto taxes, you should file an amended tax return or a delinquent tax return.

The IRS has warned that those who fail to accurately report their crypto transactions could face criminal and financial penalties.

IRS issues another cryptocurrency tax warning

A copy of the letter was forwarded by CoinTracker, a software that helps crypto traders prepare their taxes, in a blog post on Tuesday. The letter is understood to have been sent on August 14. Bloomberg said in a report that the U.S. tax authorities have confirmed the authenticity of the letter.

There are three types of letters, namely 6174, 6174-A and 6173. The first two letters are relatively mild "education letters" reminding taxpayers how to report transactions related to cryptocurrency. If the encryption part is omitted when reporting or the tax return is not submitted, the tax return must be modified or submitted a new return; while the 6173 letter is more severe, indicating that if the recipient does not respond, it will be audited.

It is reported that the IRS requires US taxpayers to answer when submitting tax returns: "At any time in 2020, did you receive, sell, send, exchange, or otherwise obtain any financial benefits of virtual currency?" These cryptocurrency-related questions appear on Form 1040 Schedule 1, requiring taxpayers to answer them clearly. The purpose of the proposal is to increase the level of voluntary compliance with the rules and collect more data on US cryptocurrency holders.

This is Schedule 1 of last year's Form 1040

Holder information may come from the exchange

To date, the IRS has sent warning letters to taxpayers several times.

Back in 2018, Coinbase sent a warning to 13,000 customers that it was complying with a court order to provide the IRS with account information from 2013 to 2015.

In July 2019, the IRS sent warning letters to more than 10,000 American taxpayers who held cryptocurrencies. The letters were of the three types mentioned above: 6174, 6174-A, and 6173.

On October 9, 2019, the IRS released comprehensive new guidance on cryptocurrency taxation, including clearer hard forks, cost calculations, transfers, gifts, and donations. This is the first revision since the IRS issued guidance on cryptocurrency taxation in 2014.

In fact, the IRS has been sending CP2000 letters throughout 2019. These letters are automatically generated when there is a mismatch between the Form 1099-K reported by a cryptocurrency exchange and the one reported on a taxpayer’s tax return.

IRS Commissioner Chuck Rettig once said in a statement: "Taxpayers should take these letters seriously, review their tax returns, and amend past returns when appropriate to pay taxes, interest and penalties... The IRS is expanding its work involving cryptocurrencies, including the use of data analysis, and we are focused on law enforcement to help taxpayers fully understand and fulfill their obligations."

In addition, according to the previous IRS Announcement No. 2014-21, the IRS regards cryptocurrencies as property under US tax law. When users buy cryptocurrencies at a given price and then trade them, they have to pay capital gains tax because it is regarded as property. If the transaction is not reported to the IRS, taxpayers will face criminal and financial penalties.

As for how the IRS knows who owns cryptocurrencies, many people speculate that the information may come from exchanges.

Coinbase is one of the sources of speculation.

Chanda Lodha, co-founder of CoinTracker, said Coinbase is "a public exchange that syncs between users who receive these letters." The IRS subpoenaed Coinbase in 2016, demanding information about its users' holdings and transactions.

Many countries require cryptocurrency traders to pay taxes

Cryptocurrencies require taxation, meaning that every time a cryptocurrency is traded, a trader’s gains or losses must be calculated and reported, and it also means that those who receive cryptocurrency wages must report their income.

Although the tax policies on cryptocurrencies vary from country to country, most governments generally do not regard them as currencies, but rather as investment assets that are subject to tax.

This is the case in the UK, where HMRC treats personal crypto assets as personal investments, and holders are required to pay capital gains tax when they convert cryptocurrencies into fiat currency or other tokens.

The EU's universal cryptocurrency taxation policy is still being formulated, so the financial policies and tax laws of each country vary greatly.

The most stringent may be France, where the cryptocurrency tax rate once reached 45%. At the end of 2018, the French government lowered the cryptocurrency income tax rate, and the profits related to cryptocurrencies were regarded as capital gains of intangible assets, and a fixed interest rate of 19% plus social security contributions was required. However, the new rules only apply to investment income, and the income from mining and other commercial activities is still calculated at the previous tax rate.

Italy does not have a specific cryptocurrency taxation policy, but income earned through cryptocurrencies is subject to personal income tax.

In contrast, Germany is more relaxed. Income tax is required for cryptocurrency purchases within one year, but it is tax-free after one year. In addition, the income obtained through mining is not subject to value-added tax.

As the first country in the world to implement a full cryptocurrency taxation plan, Japan's taxes are quite high. According to the Japanese National Tax Agency, the cryptocurrency tax rate is progressive, ranging from 15% to 55%. If the annual income exceeds 40 million yen, the excess will be subject to a maximum tax rate of 55%.

Last month, the South Korean Ministry of Finance announced a tax law revision plan. From October 2021, if local taxpayers earn more than 2.5 million won from cryptocurrency transactions, the South Korean government will impose a 20% capital gains tax on them.

In addition, countries such as Canada, Thailand, Israel, Venezuela, Romania, Bulgaria and others have also introduced policies related to cryptocurrency taxation.

Although many countries have introduced relevant policies, the actual situation does not seem to be ideal. Industry insiders pointed out that due to the anonymity of cryptocurrencies, investors rarely disclose their earnings to the public. The introduction of tax policies may make cryptocurrencies lose their original meaning.

On the other hand, even with penalties and regulations, it is not possible to fully grasp everyone's situation, but it will prompt investors to turn to countries that do not have capital gains taxes on virtual currencies.

However, there is no doubt that if cryptocurrencies want to be legalized, the formulation of tax policies will be the only way forward.