Last year’s crash in cryptocurrency prices has many Americans souring on digital assets as an investment. Still, the IRS continues to expand its efforts to locate taxpayers who are using cryptocurrency to avoid taxation. The COVID-19 pandemic slowed down the agency’s Virtual Currency Compliance Campaign, but the IRS is once again ramping up its enforcement efforts. In September, the agency received a judge’s permission to issue a summons requiring that a bank turn over information on customers using the popular crypto broker sFOX. It has also warned taxpayers that it may take additional action to get banking information for taxpayers using other brokers. Additionally, the IRS is planning to spend a portion of the funding the agency received through the IRA of 2022 to improve its ability to monitor cryptocurrency transactions.
The IRS treats cryptocurrencies such as Bitcoin and Ethereum as property, and taxpayers are required to pay the capital gains tax on any profits they earn by buying and selling virtual currency. For the 2022 tax year, the draft of Form 1040, U.S. Individual Income Tax Return, includes an updated question on whether a taxpayer has engaged in any cryptocurrency transactions. If you sold or are planning to sell any cryptocurrency during 2022, it’s better to disclose your profits to the IRS and pay the tax due than it is to get caught not disclosing the assets to the government and face penalties and interest.