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Crypto tax evasion
But how does cryptocurrency lead to tax evasion?
According to tax experts, it largely comes down to lax reporting requirements.
The IRS may not be able to track crypto earnings or transactions if they are not reported by exchanges, corporations, and other third parties. And that means the income may not be taxed.
“Nobody has set clear rules about it, so a lot is not reported,” said Jon Feldhammer, partner at law firm Baker Botts and former senior litigator at the IRS.
“Every time you create a path of non-reporting, you create an opportunity to capitalize on tax fraud in incomprehensible or much elusive ways,” he said.
Crypto is fast becoming an alternative to cash as more and more merchants accept Bitcoin and other virtual currencies as a means of payment. However, cash is more regulated.
For example, a company that receives more than $ 10,000 in cash from a customer must file a currency transaction report. This can happen when a consumer buys a car for more than $ 10,000 in cash, when someone wins big at the casino, or when a bank receives a large cash deposit.
These reports tell the government that a buyer has a lot of money that may or may not be reported on a tax return.
However, the same rules don’t apply to crypto. A used car company that receives $ 20,000 worth of Bitcoin from a customer does not need to file a report of currency transactions. This income can also remain untaxed if it is not reported on the business owner’s tax return, Feldhammer said.
“Although cryptocurrency transactions are a relatively small part of business income today, they are likely to grow in importance over the next decade, especially given a broad system of reporting financial accounts,” the financial report said.
Additionally, virtual currencies do not have to be bought or sold through an exchange, making these transactions more opaque to government officials.
Biden crypto proposal
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About 80% of the “tax gap” in the US is due to underreported income, according to the Treasury Department, especially the wealthy who hide income in opaque structures.
Stricter reporting standards – including “full reporting” for cryptocurrency – are among the most effective ways to improve tax compliance.
Biden’s tax agenda would treat crypto transactions like cash and require companies to report if they received more than $ 10,000 in virtual currency.
Financial institutions, payment processing companies and stock exchanges and custodians for digital assets would also have to report crypto transactions above a certain threshold, according to an analysis of the proposal published by the law firm Greenberg Traurig.
The IRS has already shown a greater interest in learning more about taxpayers’ crypto activities. The agency asked a question about cryptocurrency holdings on page 1 of the 2020 tax returns.
Biden’s compliance agenda would have to be passed by Congress. The overall plan would raise $ 700 billion in the first decade and an additional $ 1.6 trillion in the second decade, according to Treasury.
The White House would use these funds to fund action in the American Families Plan. This proposal includes additional funding for two years of free universal preschool, two years of free community college, heavily subsidized childcare for middle-class families, federal paid family vacations, and expanded child tax credits.