To Report, or Not to Report? Crypto Tax Delinquents Decide

Earlier this week, it was reported that the IRS had sent more than 10,000 letters of warning to individuals it suspected to own (or have owned) cryptocurrency and not reported earnings. Now, according to a new piece from Bloomberg, many of the letters’ recipients are facing an important decision: to report or not to report?

After all, if someone has failed to report gains on cryptocurrency year after year, is it better to turn in amended or delinquent returns and face possible fines, or is it better to twiddle one’s thumbs, whistle, and pretend that nothing ever happened?

Anyone get one of these IRS notices? I payed taxes on Bitcoin gains during last two bubbles, so I’m guessing they send these to all people who declared #bitcoin gains? I declared a cost basis of 0…which is essentially true (I mined back in 2010, so I spent like pennies)… pic.twitter.com/VAAUCy2cKg
— ₿ Goss, MD BTC/LN⚡ ? ? ? ? (@_drgo) July 26, 2019

”Your days are numbered.”

For James Creech, San-Francisco based tax lawyer, the better decision is clear: “For 90% of people it’s not worth the time or the effort to fight or hide from the IRS,” he told Bloomberg. “Amend the returns, take the lumps, pay the tax and penalties and consider yourself lucky to have crypto gains instead of crypto losses.”

And indeed, the letters are likely an early sign that the IRS is clamping down on crypto retail investors, who are notoriously delinquent in their tax-reporting duties.

Don Fort, chief of the IRS’ criminal investigation efforts, has also previously described Cryptocurrencies as a “significant threat” to tax collection. In an official statement on June 7, Fort said that the J5 group, an international task force formed to deal with tax fraud in the cryptosphere, had “found innovative ways to tackle these problems, remove barriers, and develop processes [to deal with crypto-related tax fraud.”

“It is not a good time to be a tax criminal on the run. Your days are numbered,” he added. Though the tone of this last line is rather ominous, tax litigator Guinevere Moore told Bloomberg that the IRS is much more likely to attempt to force delinquents into compliance rather than prosecute them, although criminal cases are not completely out of the question.

In fact, criminal cases are likely to be levied against individuals who are suspected to be high-volume traders who have filed to report. It is perhaps for this reason that Sean Ryan, chief technology officer of NODE40, said that “most of the big fish” are already disclosing their crypto transactions on tax returns.

“They know they have a lot to lose,” he told Bloomberg.

In an interview with Finance Magnates conducted earlier this year, Ryan also said that businesses are generally less delinquent than the average retail investor for the same reason. “If you’re in violation of reporting requirements on a business, that could put you out of business,” he said. “We [have] found that more businesses were looking to pay taxes, were looking to understand [their taxes], and also–more importantly–not looking to overpay their taxes.”

Is all of this effort really worth it?

While it’s not clear exactly what the amount of money owed by delinquent taxpayers actually is, analysts say that there are a few statistics that could point in the right direction.