The Taxman Will Soon Come A-Knocking as the IRS Requests for Funding to Expand on Crypto Tax Enforcement

Crypto Taxation 

The Internal Revenue Service (IRS) recently issued, in late May, its latest Congressional Budget Justification and Annual Performance Report and Plan. In this fiscal year the agency has asked for a $32 million boost to its crypto and cyber operations. Crypto investors can expect a more aggressive stance from the revenue service. If there are two certainties in life, tax is definitely one of them.  

The request for this funding is to expand the IRS’s Criminal Investigation Department in the following areas:

• Increase the use of specialized contractor support service by a group of cyber/crypto experts
• Development of an internal dashboard for cryptocurrency/blockchain analytics
• Establishment of a One-IRS approach to cryptocurrency non-compliance 
• Solicit private sector’s expertise in applied analytics, cybercrime, forensic accounting/discovery support, investigative support, and related consulting services
  

The tax authority felt the need to remain abreast with the speedy development within the crypto space. The agency finds it necessary to be able to track not just tax-related matters but also other cyber crimes which are not tax-related. The proposed funding will also enable the tax authority to be able to track illicit activity patterns and it includes activities involving cryptocurrencies. 

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Keeping Crimes at Bay

Cybercrimes are on the rise and the most convenient method to facilitate these criminal activities is through a decentralized network. Cryptocurrencies are often used in ransomware and this has been openly recognized as one of the main impediments to the growth of the crypto industry. Coindesk recognized this malign in their recent article titled, ‘State of Crypto: Ransomware Is a Crypto Problem’. They spelled out the importance to protect not just assets, but critical infrastructures and users’ private information.

The recent attack by hackers on the Colonial Pipeline Operator also sparked debate on the promulgation of cryptocurrency. Anonymity is a convenient tool for malicious and criminal activities and attacks are becoming more ambitious. Whilst the IRS may appear to be an unlikely body tasked with the role of stemming out these illicit activities, the interoperability of government enforcement agencies has become an important bridge through surveillance activities and active data tracking. 

Biden Administration’s Tax Enforcement Crackdown

So far, there has been no direct link between tax enforcement activities with spreading fear, uncertainty, and doubt (FUD) in the crypto space. Paying taxes is an obligation many accept, regardless of the nature of the industry. Activities involving crypto assets are no exception.

For tax purposes, crypto assets are treated as properties just like stocks, bonds, real estate, and gold. Amidst the backdrop of one of the most aggressive dollar printing in America’s history, the Biden Administration has taken extreme measures to ensure the economy stays afloat. New reporting rules were imposed on licensed entities dealing with crypto assets and this includes exchanges and custodial service providers. 

With stimulus packages being handed out in the trillion of dollars, the government hopes that the new liquidity will kickstart the economy through spending. The decision to invest will be discouraged through the imposition of taxes, such as capital gains tax.  

Recognizing that Tax is a Necessary Obligation 

The old chestnut still rings true:” in this world nothing can be said to be certain, except death and taxes.” One cannot loudly demand the recognition of crypto assets but in the same breath lament the tax obligations that come with recognition. There may be some confusion with the inconsistent classification of crypto assets, but this is certain to be resolved. Either through a more definitive legislative framework or through the courts like the ongoing legal battle in SEC v Ripple, we may well have our answer soon.