(PresidentialInsider.com)- Last week, Barclays released an analysis that estimates that the Internal Revenue Service could be missing out on collecting as much as $50 billion a year from cryptocurrency traders not paying taxes on their transactions.
By extrapolating 2017 IRS data, Barclays estimated that the current crypto “tax gap” – the difference between how much tax revenue the IRS collects and how much it is owed – represents 10 percent of the overall national tax gap.
However, according to Barclays managing director Joseph Abate, the crypto tax gap is likely to be even higher than that because “much of the DeFi [decentralized finance] activity occurring today did not exist four years ago.”
“Decentralized finance” aims to recreate traditional systems specifically for cryptocurrency, most of which run on the Ethereum blockchain.
According to Abate, while crypto transactions may all be visible on the blockchains, if all of the “counterparties are anonymous,” the IRS will have a difficult time figuring out who owes taxes on the transactions.
In recent years, the IRS has greatly stepped up its efforts to crack down on crypto traders, increasing personnel as well as investing in process and form amendments.
In the last two years, the IRS 1040 forms have included a question asking taxpayers did they, at any time during the year, “receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency.”
According to CPA Austin Woodward, the CEO of crypto accounting platform TaxBit, failing to honestly report crypto gains on your 1040 form could result in a lengthy audit and possible fines.
Crypto traders are encouraged to report crypto purchases and sales on their taxes, especially as IRS audits are lagging two years behind.
Woodward recommends that traders keep detailed records of crypto transactions. He also warns that traders who failed to report gains on previous tax returns could still get caught by the IRS. To avoid that, Woodward suggested traders amend any previous tax returns, which can be done with the IRS electronically.