For years, cryptocurrency holdings of U.S. taxpayers have existed in a sort of reporting gray zone. But now, those crypto wallets are getting a whole lot of attention from the Internal Revenue Service and President Biden, who appear determined to crack down on tax cheats.
The timing makes sense.
The president needs to raise money, relatively quickly, for his own ambitious economic agenda. And the “tax gap,” which is the difference between taxes paid and taxes owed, is a big pool of cash ripe for the picking. IRS chief Charles Rettig says the country is losing about a trillion dollars every year in unpaid taxes, and he credits this growing tax gap, at least in part, to the rise of the crypto market.
The federal government is so convinced of the potential for income from back-due taxes that the White House wants to give the IRS an extra $80 billion and new powers to crack down on tax dodgers, including those parking their cash in crypto.
“The IRS is in the business of collecting revenue,” said Shehan Chandrasekera, CPA, and head of tax strategy at CoinTracker.io, a crypto tax software company.
“Historically, if they spend $1 for any type of enforcement activity, they make $5…I think crypto enforcement activities are even higher than that,” he said.
Non-compliance made easy
In the U.S., it is easy to be an unintentional crypto tax cheat.
For one, the IRS hasn’t exactly made it easy to report this information.
Tax year 2019 was the first time the IRS explicitly asked taxpayers whether they had dealt in crypto. A question on form Schedule 1 read, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
But experts said the question was vague, and crucially, not everyone files this specific document. A Schedule 1 is typically used to report income not listed on the Form 1040, such as capital gains, alimony, or gambling winnings.
So in 2020, the IRS upped its game by moving the virtual currency question to the 1040 itself, which is used by all individuals filing an annual income tax return.
“[They put it] right after your name and social security number, and before you put any income numbers or deduction numbers in,” explained Lewis Taub, CPA and director of tax services at Berkowitz Pollack Brant. This made the question virtually impossible to miss.
But perhaps the bigger issue, according to Shehan, is that many filers have no clue how to calculate their crypto capital gains and losses.
If you trade through a brokerage, you typically get a Form 1099-B spelling out your transaction proceeds, streamlining the reporting process.
That doesn’t happen in the crypto world, Shehan said. “Many crypto exchanges don’t report any information to the IRS.”
While some crypto exchanges have begun to issue a tax form known as the 1099-K – which is traditionally given to an individual who engages in at least 200 transactions worth an aggregate $20,000 or more – in the context of crypto, this form only reports the total value of transactions. The total value does not factor in how much the person paid for the cryptocurrency in the first place, something referred to as the “cost basis,” which makes it hard to calculate the taxable gain.
“A lot of people have actually over-reported their income, because they got confused,” explained Shehan.
But the biggest issue driving non-compliance is the fact that the tax rules surrounding digital currencies are still being worked out, and in a state of constant flux.
The IRS treats virtual currencies like bitcoin as property, meaning that it is taxed in a manner similar to stocks or real property. If you buy one bitcoin for $10,000 and sell it for $50,000, you face $40,000 of taxable capital gains. While this concept is relatively simple, it isn’t always clear what constitutes a “taxable event.”
Is buying dogecoin with your bitcoin a taxable event? Purchasing a TV with your dogecoin? Buyingan NFT with ether?
All of the above are technically taxable events.
“The government says if I buy something with crypto, it is as if I liquidated my crypto no differently than if I sold any other property,” said Taub.
Mining dogecoin for fun qualifies as self-employment income in the eyes of the government. According to cryptocurrency tax software TaxBit – which recently contracted with the IRS to aid the agency in digital currency-related audits – tax rates vary between 10-37% on mining proceeds.
“Crypto miners have to pay taxes on the fair market value of the mined coins at the time of receipt,” wrote crypto tax attorney Justin Woodward. While there are ways to get creative to minimize this tax burden, such as classifying mining as a business and deducting equipment and electricity expenses, it takes a bit of filing acrobatics to make it work.
Earning interest on the bitcoin sitting idle in your crypto wallet also counts as income and is taxed as such. Exchanges like Coinbase have also begun to send Form 1099-MISC to taxpayers who earned $600 or more on crypto rewards or staking.
The IRS crypto crackdown
Crypto trading volume may have fallen off a cliff in the last few weeks, but the overall market value of digital currencies is still up about 75% this year. The IRS has made it clear that it wants a piece of the action.
The agency recently ramped up efforts to subpoena centralized crypto exchanges for information about noncompliant U.S. taxpayers.
This spring, courts authorized the IRS to issue John Doe summonses to crypto exchange operators Kraken and Circle as a way to find individuals who conducted at least $20,000 of transactions in cryptocurrency from 2016 to 2020.
The IRS also put this same type of summons to use in 2016, when it went after Coinbase crypto transactions from 2013 to 2015.
Issuing these summons one exchange at a time is a clumsy way to capture noncompliant U.S. taxpayers, but it can be effective, according to Jon Feldhammer, a partner at law firm Baker Botts and a former IRS senior litigator.
In 2019, the IRS announced it was sending letters to more than 10,000 people who potentially failed to report crypto income.
Rettig said in a statement that taxpayers should take the letter “very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”
According to Shehan, the infamous “Letter 6173” gave individuals 30 days to respond to the IRS, otherwise they risked having their tax profile examined. Letters went out again in 2020, and a fresh round of these stern warnings are expected to be sent this autumn.
Even the threat of a letter has a lot of people seeking the counsel of accountants as to whether they should get ahead of a potential audit and be proactive about amending past returns.
“A lot of people ask me on Twitter: ‘Oh my god, in 2018, I had $200 worth of capital gains I didn’t report. What should I do?'” recounted Shehan. “In that case, it just is not worth amending the return to pick up $200 worth of income…The high-level thing is that if you didn’t do anything intentionally, you are fine.”
The IRS is also getting smarter about uncovering crypto tax evaders with the help of new data analytic tools it can employ in-house.
The agency’s partnership with TaxBit is a part of this effort. Taub describes the software as being able to go through cryptocurrency wallets and analyze them to figure out what was bought and sold in crypto. In addition to enlisting the services of the vendor itself, Taub says that IRS agents are being trained up on the software as a way to identify tax dodgers.
Biden’s new crypto rules
The president’s 2022 budget proposal could lead to a raft of new crypto reporting requirements for those dealing in digital coins.
The U.S. Treasury Department’s new “Greenbook,” released in May, calls for more comprehensive reporting requirements for crypto, so it’s as hard to spend digital currencies without getting reported as it is to spend cash today.
One proposal would require businesses to report to the IRS all cryptocurrency transactions valued at more than $10,000. Another calls for crypto asset exchanges and custodians to report data on user accounts which conduct at least $600 worth of gross inflows or outflows in a given year.
Another potential major blow to crypto holders: Biden’s proposal to raise the top tax rate on long-term capital gains to 43.4%, up from 23.8%.
“Crypto gains are being taxed as any other type of gain in assets, either at long-term capital gains or ordinary rates. President Biden has proposed to eliminate the difference between the two,” said David Lesperance, a Toronto-based attorney who specializes in relocating the rich.
Lesperance told CNBC the proposal would also function retroactively and apply to any transactions which took place after April 28, 2020.
“This translates into $19,800 in increased capital gains tax for each $100,000 in capital appreciation of crypto,” he said.
Amid the rising crypto crackdown here in the U.S., Lesperance has helped clients to expatriate in order to ditch their tax burden altogether.
“By exercising a properly executed expatriation strategy, the first $750,000 in capital appreciation is tax-free and the individual can organize themselves to pay no U.S. tax at all in the future,” he said.
But Lesperance warned that taxpayers need to move fast. “The runway to execute this strategy is very short,” he said.
Sam Bankman-Fried tried to influence witness through Signal, DOJ alleges
Former FTX chief executive Sam Bankman-Fried (C) arrives to enter a plea before US District Judge Lewis Kaplan in the Manhattan federal court, New York, January 3, 2023.
Ed Jones | AFP | Getty Images
Federal prosecutors are attempting to bar indicted FTX co-founder Sam Bankman-Fried from using encrypted messaging software, citing efforts that may “constitute witness tampering,” according to a letter filed in Manhattan federal court Friday.
Bankman-Fried reached out to the “current General Counsel of FTX US who may be a witness at trial,” prosecutors said. Ryne Miller, who was not identified by name in the government filing, is the current counsel for FTX US, and a former partner at Kirkland & Ellis.
The government claims that Bankman-Fried wrote to Miller via Signal, an encrypted messaging app, on Jan. 15, days after bankruptcy officials at crypto exchange disclosed the recovery of more than $5 billion in FTX assets.
“I would really love to reconnect and see if there’s a way for us to have a constructive relationship, use each other as resources when possible, or at least vet things with each other,” Bankman-Fried allegedly told Miller.
Bankman-Fried has also been in contact with “other current and former FTX employees,” the filing said. Federal prosecutors allege that Bankman-Fried’s request suggests an effort to influence the witness’s testimony, and that Bankman-Fried’s effort to improve his relationship with Miller “may itself constitute witness tampering.”
Both Miller and a representative for Bankman-Fried declined to comment.
In restricting Bankman-Fried’s access to Signal and other encrypted messaging platforms, the government cites a need to “prevent obstruction of justice.” Federal prosecutors claim that Bankman-Fried directed Alameda and FTX through Slack and Signal, and ordered his employees set communications to “autodelete after 30 days or less.”
Citing previously undisclosed testimony from ex-Alameda CEO Caroline Ellison, the government claimed that Bankman-Fried indicated “many legal cases turn on documentation and it is more difficult to build a legal case if information is not written down or preserved.” Ellison pled guilty to multiple charges of fraud and has been cooperating with the U.S. Attorney’s efforts to build a case against Bankman-Fried.
Bankman-Fried pled not guilty to eight charges in connection with the collapse of his multibillion-dollar crypto empire, FTX. He is due in federal court in October, after being released on $250 million bond.
Amazon to start charging delivery fees on Fresh grocery orders under $150
Brendan McDermid | Reuters
Amazon will start charging delivery fees for Fresh grocery orders that are less than $150, in a move it said will help keep prices low on its services.
Beginning Feb. 28, Prime members who want home delivery from Amazon Fresh will incur a $9.95 delivery fee for orders under $50, while orders between $50 and $100 will include a $6.95 delivery fee, and orders between $100 and $150 will carry a $3.95 delivery fee, the company said in a note to customers viewed by CNBC. Only Prime members can use the delivery service, although anybody can shop at an Amazon Fresh grocery store.
Amazon previously guaranteed members of its $139-a-year Prime service free delivery on Fresh orders over $35.
“This service fee will help keep prices low in our online and physical grocery stores as we better cover grocery delivery costs and continue to enable offering a consistent, fast, and high-quality delivery experience,” the notice stated.
The move comes as Amazon CEO Andy Jassy has embarked on a wide-ranging review of the company’s expenses amid slowing sales and a worsening economic outlook. Amazon has eyed laying off 18,000 employees, frozen hiring in its corporate workforce, and paused or canceled some projects such as a sidewalk robot and a telehealth service.
Amazon has previously recalibrated its approach to online grocery deliveries, a business that is notoriously challenging from a cost and efficiency perspective. In 2021, Amazon added a $10 service fee for Whole Foods delivery orders to Prime members, after previously offering them for no extra charge.
Tesla just had its best week since May 2013
Tesla CEO Elon Musk smiles as he addresses guests at the Offshore Northern Seas 2022 (ONS) meeting in Stavanger, Norway on August 29, 2022.
Carina Johansen | AFP | Getty Images
Tesla shares surged 33% this week, marking their best weekly performance since May 2013 and second best on record.
The stock rose 11% on Friday to close at $177.88. The rebound followed a six-month period in which Tesla shares had declined more than 40%. The stock’s 65% plunge in 2022 was its worst in Tesla’s 12-plus years as a public company.
Tesla’s rally this week was aided by an upbeat fourth-quarter earnings report. During the call with shareholders and analysts, CEO Elon Musk said the company was on target to potentially produce 2 million vehicles in 2023, and he suggested demand would support sales of those cars as well.
Official guidance called for production of 1.8 million vehicles this year. The company has not revised its longstanding target for 50% compound annual growth rate over a multi-year horizon.
Tesla’s five day performance charted against Rivian and Ford Motor Company.
Tesla beat on both the top and the bottom lines, recording total revenue of $24.32 billion, including $324 million of deferred revenue related to Tesla’s driver assistance systems. The company cut prices for its cars dramatically in December and January, leading to concern about demand and a buildup of inventory.
Analyst reaction to Tesla’s numbers was mixed.
“For bulls, the growth story is alive and well,” Bernstein’s Toni Sacconaghi, who has an underperform rating on the stock, wrote in a note on Thursday. “For bears, the numbers don’t lie.”
In early January, Tesla reported fourth-quarter vehicle deliveries and production that fell shy of expectations.
Tesla’s stock jump came amid a broader market rally. The S&P 500 was up 2.2% for the week and the Nasdaq gained 4.3%.
Rival electric car manufacturer Lucid spiked on Friday as well, rising 43% on reports of rumors that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, intended to take the company private.
Some of Tesla’s underperformance last year was attributed to Musk’s shift of focus to Twitter, which he acquired for $44 billion in October. Under Musk’s leadership, Twitter has experienced mass layoffs and fleeing advertisers, gutting morale.
Tesla remains the second most-shorted stock in U.S. markets, behind only Apple, meaning that a large numbers of investors are betting on a decline. Over 94 million of the automaker’s shares are shorted, according to data from S3 Partners.
Despite the rally, active short selling continues, S3 managing director Ihor Dusaniwsky told CNBC. Short sellers view Tesla’s appreciation as having created “an overheated and overbought stock that is due for at least a short-term reversal,” he said. In the last week, S3 Partners said it’s seen a 3.9% increase in total shares shorted, while investors shorting the stock lost $4.3 billion over that stretch.
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