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Income taxation of cryptocurrencies is currently a dark arena. It would appear that even the US Internal Revenue Service, or IRS, has a hard time figuring out who owes what, according to Wendy Walker, solution manager at tax compliance firm Sovos.
“In the typical tax system, the IRS uses 1099 reporting,” Walker told Cointelegraph in an interview. “So, 1099, W2, that tax return, is the primary tool they use to enforce tax compliance,” he added. When people fail to report their crypto assets, the IRS has a headache.
In 2019, 10,000 people involved in cryptocurrencies received warning letters from the IRS, informing some people that they owed money or had been fined. Others have been told to add their crypto assets to their reports.
The tax authority also recently added a question to the top of Form 1040, asking filers if they handled encryption during the relevant fiscal year.
“Now they are retrieving all of this information to show they have to sift through,” Walker explained. “To combat this huge heap of data, in May 2020 the IRS publicized its Request for Proposal, or RFP, a search for digital resource savvy people to navigate the piles of information, Walker said.
“The point is, they get by the hard way. This question about 1040, this RFP for people to sift through information that has been sent back, execution letters to taxpayers – it’s like they’re throwing stuff out there to see what. it will stick. “
The difficulty is the result of old processes which, in some cases, have difficulty in satisfying the new possibilities brought by technological innovation.
