Closing the Tax Gap
In Treasury terms, the tax gap is the difference between the actual tax liability and what is actually paid on time. According to taxfoundation.org, the nation’s leading independent tax policy nonprofit, the U.S. tax gap exceeds $500 billion each year. While there are many factors that contribute to the gap, a full 80 percent is due to underreported income.
It’s no secret that the cryptocurrency market is rife with illegal activity, particularly tax evasion. And a lot of the problems can be laid squarely at the feet of the Internal Revenue Service. Cash is heavily regulated with strict requirements to file currency transaction reports while cryptocurrencies are not. With no clear rules from the IRS on crypto reporting, many wealthy Americans have chosen to hide their earnings in the digital economy as a means to skirt paying taxes. The Biden Administration is working to remedy the situation.
Tools in the Internal Revenue Service Toolbox
New to the 2020 federal tax return (Form 1040) is a box on Page 1 that taxpayers must check if they have purchased cryptocurrencies in the past year. The form further clarifies the meaning of virtual currency. As part of the Biden tax agenda, crypto transactions over $10,000 in value require reporting.
Recently the Internal Revenue Service was granted approval to issue a John Doe summons to the top-rated crypto exchange Kraken FX. John Doe’s are used when the identity of a taxpayer is unknown. The summons will allow the IRS to obtain details on user transactions on the Kraken FX exchange as a means to uncover those going unreported. The agency is interested in taxpayers who have conducted at least $20,000 worth of crypto-transactions between 2016 and 2020.
It should be noted that the John Doe summons makes no indication that Kraken FX has engaged in any wrongdoing.