Here’s how the IRS can seize your Bitcoin and Crypto

US Watchdog Says That IRS Refused to Clarify Its Authority on Crypto Tax Guidance

Crypto holders who fail to pay their taxes might have their holdings confiscated by the IRS.

The US Internal Revenue Agency has threatened to confiscate the crypto holdings of those who fail to pay their overdue taxes. By doing this, the IRS will be treating digital assets the same as other properties that can be seized in case of tax defaults.

In a virtual conference hosted by the American Bar Association, the deputy chief counsel for the IRS, Robert Wearing, stated that the assets would be seized and used to repay outstanding tax debts.

In his own words, Wearing stated, “The IRS will seize that property and will attempt to follow its usual procedures to sell it and use it to satisfy collection,”

According to a 2014 notice issued by the IRS, virtual currencies will be treated the same way as property.

Challenge in proving crypto ownership: IRS

The IRS usually obtains details of crypto users from the exchange account. However, finding the number of holdings a user has can be difficult because some crypto holders hold their tokens in offline wallets.

One of the main reasons Bitcoin (BTC) is slow in being adopted as a medium of exchange is taxation. Whenever Bitcoin is converted into cash, the IRS views the transaction as a taxable event posing a challenge.

One of the main ways to avoid crypto taxation is by borrowing against your crypto holdings. The CEO of MicroStrategy, Michael Saylor, has advised investors to obtain loans that have been collateralised against their crypto holdings.

Taxation on ETFs

The IRS has been looking keenly in the crypto market to find ways of expanding its revenue streams. One of the crypto products that the agency taxes is exchange-traded funds. Profits gained after ETFs are sold at a discount are taxed.

Investors who hold ETFs for more than a year are taxed using long-term capital gain rates, which equates to a maximum of 23.8%, including a 3.8% Net Investment Income Tax. ETFs held for less than 12 months are taxed at the prevailing income rates.

However, investing in ETFs has tax advantages because of two reasons. ETFs have lower capital gains than other investment vehicles, and tax is only paid when the ETF is sold.

The IRS is not the only agency that is threatening to hold crypto holdings of tax defaulters. The city of Seoul in South Korea seized cryptocurrencies held by tax evaders.

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A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and enjoys writing about cryptocurrencies and fintech. Ali’s work has been published on a number of cryptocurrency publications.