The Tax Man is Coming for Bitcoin: IRS “Enforcement” Impending in 2021

Bitcoin is entering 2021 in the best place its ever been. With strong movements past $30,000, the whole world is waiting to see how high Bitcoin will go. But while BTC hodlers’ pockets are busting with cash, the United States’ tax arm, also known as the Internal Revenue Service (IRS), is gearing up for a crackdown on unchecked earnings.

Indeed, in an article for Law360, Don Fort (who previously headed the IRS’ criminal investigation division) said that while the tax agency has was previously taking a more “educational” attitude toward cryptocurrency hodlers, school days are over: the time for “enforcement” has come.

“The IRS has been not-so-quietly positioning itself for a smooth transition from education to enforcement in 2021 and beyond,” he wrote. The article was co-authored by Lawrence Sannicandro, a lawyer who has focused his career on federal and state tax controversies. Both men are part of the team at Kostelanetz & Fink, LLP.

“[...] Even though the IRS has not yet announced many mainstream tax evasion or money laundering cases involving virtual currency, that trend should change in 2021,” Fort and Sannicandro wrote.

Don Fort, former Chief of the Internal Revenue Service’s Criminal Investigation (CI) Division, and current Director of Investigations at Konstelanetz and Fink.

Indeed, in December 2020, CoinTelegraph reported on the addition of a crypto-related question at the top of form 1040. This seems to indicate that the IRS is preparing to eradicate underpayment.

Coinbase users could be the IRS’s first target

Perhaps unsurprisingly, the article says the IRS’s first and foremost source of information on possibly delinquent crypto hodlers is Coinbase.

In 2018, Coinbase was forced to hand over account information for some 13,000 users; in the following years, many of those 13,000 individuals have been the recipients of letters from the tax department. The letters have advised cryptocurrency owners that if they did not accurately report their cryptocurrency holdings on federal income tax returns, they need to “file amended or delinquent returns.”

Since then, Coinbase has also integrated features to help its users file tax returns on their holdings accurately and on time.

However, Coinbase may only be the beginning: the article also specifically mentioned that the IRS went so far as to request information from Luxembourg-based exchange Bitstamp on one of its American users.

Crypto holders could be attributing to a widening “tax gap” in the USA

The IRS’s coming enforcement on crypto hodlers is apparently in part because of a widening “tax gap” in the United States. In other words, the average amount of what individuals and other entities should owe the government is increasingly lower than what they actually pay.

Don Fort and his co-author both believe that crypto hodlers could be playing a big part in the apparent growth of the tax gap. The IRS seems to share a similar belief.

“As of Dec. 10, with Bitcoin fresh off new record highs, the market capitalization of Cryptocurrencies was $524 billion,” Fort and Sannicandro wrote.

“Assuming cryptocurrency-related tax liabilities of $25 billion and a 50% compliance rate, unreported cryptocurrency tax liabilities again account for around 3.2% of the $381 billion tax gap. Thus, it is likely that unreported taxable cryptocurrency transactions are contributing significantly to the tax gap.”

Lawrence (Larry) Sannicandro is a partner at Kostelanetz & Fink.