Cryptocurrency poses considerable risk of tax evasion


June 01, 2021: -The Biden administration wants to get tougher on tax cheats, and cryptocurrency is an area of interest.

Virtual currencies such as bitcoin and ethereum, collectively valued at nearly $2 trillion, offer investors a way to shield income from tax authorities.

In that way, the crypto economy provides to the U.S. “tax gap,” the difference between the tax paid and tax owed, according to the Treasury Department.

The White House estimates around a $7 trillion gap for the coming decade.

The Treasury seems concerned about wealthy Americans who shift taxable assets into the crypto economy to avoid tax particularly.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly which include tax evasion,” according to a Treasury report issued in the previous week, which outlined the Biden administration’s tax-compliance agenda.

But it essentially comes down to lax reporting requirements, according to tax experts.

The IRS may not trace crypto income or transactions if they go unreported by exchanges, businesses, and other third parties. And that means the payment may not be taxed.

“No one has put out clear rules on it, so there’s a lot of non-reporting going on,” according to Jon Feldhammer, a partner at law firm Baker Botts and a former IRS senior litigator.

“Any time you create a path of non-reporting, you create a way to benefit from tax fraud in an untraceable,” he added.

Crypto is becoming an alternative to cash as many new merchants accept bitcoin and other virtual currencies as payment. But money is more heavily regulated.

For example, a business that receives over $10,000 in cash from a customer should file a currency transaction report. This may happen if a consumer purchases a car for above $10,000 in cash, if someone wins big at the casino or if a bank receives a hefty cash deposit.

These reports indicate that a buyer has much money that may or may not be reported on a tax return.

But the same rules do not happen to crypto.

A used-car business that gains $20,000 of bitcoin from a customer doesn’t have to file a currency transaction report; that income may also go untaxed if it’s unreported on the business taxes return of the owner, Feldhammer said.

“Despite constituting a small portion of business income today, cryptocurrency transactions will increase an importance in the coming decade, especially in the presence of a broad-based financial account reporting regime,” the Treasury report said.

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