Virtual Currency Tax Compliance Can Be Improved – TIGTA

The Internal Revenue Service has room to improve its virtual currency tax compliance enforcement, according to the Treasury Inspector General for Tax Administration.

In a report dated July 10, 2024, the treasury watchdog noted that the IRS has established a partnership“between the criminal and civil functions to identify taxpayers who omit digital assets for their tax returns. However, [the partnership’s] primary purpose has been limited to the acquisition of tools and training, rather than pursuing taxpayers.”

In addition, TIGTA reported that the current timeline for enforcement activities “will hinder efforts to regulate the digital asset industry and may result in lost revenue and taxpayer burden.”

The Infrastructure and Jobs Act of 2021 requires brokers to file an information return for digital transactions in a calendar year. The IRS has created an information form to report information needed to calculate gains and losses of digital currency transactions, but those regulations are not effective until January 1, 2025, for gross proceeds reporting and January 1, 2026, for basis reporting.

Criminal enforcement has increased over time related to digital assets. Between fiscal year 2018 and fiscal year 2023, Criminal Investigations saw a 113 percent increase in cases with digital assets, TIGTA reported. In that time, digital asset seizure values have increased, with a highest amount of $7 billion in FY 2022. In that same window, cases recommended for prosecution has more than doubled.

Despite the increases, TIGTA notes that the “anonymity of virtual currency complicates the IRS’s enforcement efforts,” adding that there are challenges because the agency “does not have a clear window into taxpayers’ virtual currency investments or transactions because their names are generally not directly attached.”

Also, the IRS “does not consistently get reports from trading platforms on virtual currency transactions.”

TIGTA asserted that more needs to be done noting that with the limited reporting requirements and the anonymity of virtual currency and the associated transactions “has emboldened taxpayers to move money offshore, purchase illegal goods and services, and carry out other nefarious activities. Users may feel there is the possibility of avoiding tax obligations.”

By Gregory Twachtman, Washington News Editor.