The Internal Revenue Service (IRS) recently announced that they would be delving deeper into the fight against crypto related tax fraud. The regulatory authority issued a warning towards all crypto holders who might be misfiling their earnings in a bid to avoid taxation.
Following this announcement by the IRS, a Reddit user who claims to be a former employee of the regulator called the crypto compliance letters issued by the IRS “broad and very error-prone fishing expeditions”. The user, who goes by the name u/IRS_throwaway_BT, says that the letters issued by the IRS are unethical and they may have scared many people who might not have necessarily done anything wrong. The Reddit user added that many of the people affected by the letters would go ahead to seek legal and tax advice which will cost them a lot of money.
Among some of the issues that might arise during the regulator’s bid to tax cryptocurrency, u/IRS_throwback_BT pointed out that some individuals may suffer as a result of misinterpretation of their counting their losses from platforms and exchanges that are unknown to the IRS. There are losses that people may experience when they buy cryptocurrencies online and because the IRS has no way of knowing when one makes these losses, the body is likely to think that you owe more than you have stated.
The utterances by u/IRS_throwaway_BT started a thread and conversation which many cryptos interested Reddit users chimed in on. Users pointed out that the IRS already struggles with fiat currency taxes and therefore, the likelihood that the body has a firm grasp of cryptocurrency is very low. They would need to hire a tax firm that specializes in cryptocurrency and these firms are quite expensive to hire. One user says that they pay $6500 a year for accounting services for their crypto holdings.
Through their letters, the IRS has given crypto users the impression that they would be presumed guilty due to the mere fact that they use cryptocurrency. The proposition by the IRS would also require crypto users to put their privacy at risk and if users make use of exchanges that stick to maintaining client privacy, the crypto users look more guilty to the IRS. This puts individuals who engage in online crypto trading in a difficult position as far as continuing to trade goes.
The Bottom Line
The letters issued by the IRS are being viewed as a scare tactic more than they are a legitimate attempt to tax the crypto industry. Some have even claimed that the IRS is trying to raise funds after the government cuts the regulator’s budget. The letters sound like extortion by the tax body and this has led to a backlash from the crypto community.
There is a lot of doubt surrounding the ability of the IRS to properly follow cryptocurrency. The best digital cryptocurrency exchanges offer their clients the highest levels of privacy and this will prove to be a major challenge for the IRS. Only time can tell whether the IRS has the capacity to properly do their work or whether many crypto holders will fall victim to baseless tax claims from the IRS.