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A federal district court has greenlighted a John Doe summons to help the IRS fight crypto-related tax fraud. The authorization could help the U.S. government find thousands of tax cheats.
The Internal Revenue Service has received another thumbs-up from a federal court in the agency’s new passion to root out cryptocurrency tax fraud.
The U.S. District Court in the Central District of California authorized the IRS to serve a John Doe summons on Los Angeles-based OX Labs Inc., d/b/a SFOX and its subsidiaries. SFOX is a cryptocurrency prime dealer for professional traders and institutional investors and has more than 175,000 registered users.
The IRS wants information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in crypto between 2016 and 2021 with or through SFOX.
Welcome. I am Olivier Wagner from 1040 Abroad and will provide an overview of taxation of cryptocurrency, Non-Fungible Tokens (NFTs), and Decentralized Finance
First disclaimer: While cryptocurrencies and NFTs have been gaining traction, these are an extremely volatile asset class.
Likewise, it’s an ever-changing environment, so please contact me before taking anything here as true as it may have changed.
Let’s start with a review of blockchain and the building block that lead us to where we are today.
We have building blocks:
– Smart Contracts
Crypto mining has been extremely profitable over the last few years, with Bitcoin miners making an estimated $15 billion of revenue and several mining companies going public in 2021. Miners are critical to preventing the “double-spend” problem in decentralized cryptocurrency networks such as Bitcoin. They validate and add blocks of transactions to the blockchain ledger by competing with other miners to solve complex mathematical problems and receive crypto tokens as a reward for their mining activities.
Unsurprisingly, crypto mining profits have caught the attention of the IRS, which has taken an increasingly aggressive approach over the last few years to auditing and taxing mining activities. Given this increased enforcement, tax practitioners and their clients alike have explored ways to minimize mining profits by performing mining activities through tax-advantageous vehicles such as IRAs and 401(k) accounts.
2021 was an incredible year for crypto investors. Tokens such as Polygon ($MATIC), Sandbox ($SAND), Decentraland ($MANA) had incredible gains, with investors realizing returns in excess of 100% of their original investment. Yet, investors may be looking at a hefty tax bill for 2021, if they failed to plan accordingly.
Crypto investors were not the only category of persons to proser. 2021 was also a great year…for crypto-scams. Epic failures such as Squid Game ($SQUID) literally wiped millions of dollars, generating substantial losses to thousands of investors. Launched on October 26, SQUID went from a $0.01 to a peak of $2,862 in a week, before falling to $0.00 after the developers performed what is commonly known as a “rug pull” (meaning that the developers abandon the project by selling their tokens and taking the investors’ money – hence “pulling the rug out” under the investors’ money). In these cases, the investors holding the tokens sustain giant losses without further possibility of recovery.
Over the past few years, cryptocurrencies such as Bitcoin and Ethereum have received the lion’s share of attention from crypto enthusiasts and investors, sending the price of these coins to new highs. The price of cryptocurrencies, however, is notoriously volatile. At any given moment, their prices can experience wild swings based on a regulatory crackdown from a country, an announcement of a hard fork upgrade, or even a tweet. This volatility has made the adoption of digital coins as a mainstream currency, on par with the U.S. dollar or other fiat currency, impractical. As a result, despite their popularity, cryptocurrencies continue to be viewed by many as speculative assets rather than a form of currency that can be used to conduct financial transactions. Enter stablecoins.
Register TODAY For Wednesday, July 28th 2021 Tax Law Update
You are invited to attend a Freeman Law Webinar hosted by lawyers Jason Freeman, Matthew Roberts, John Reyna and Greg Mitchell at 2:00PM Central Time (Texas) on Wednesday, July 28th 2021. Freeman will provide attendees a law legal and tax update.
The topics to be discussed include:
- IRS Enforcement Trends And Cryptocurrency Updates
- Excess Benefit Transactions And Reasonable Compensation
- Lifting The Automatic Stay To Proceed With State Court Litigation
- Tax Court Updates
Click Here To Attend Complimentary Webinar
Freeman Law Legal and Tax Update Webinar-
Wednesday, July 28, 2:00 pm CT
As tax time approaches for many, taxpayers and tax professionals alike are engaging in the annual ritual of gathering their cryptocurrency transactions and seeking out the latest and greatest guidance from the IRS on the subject. As luck would have it, the IRS recently released an internal memorandum fleshing out its stance on the taxation of virtual currency received in exchange for providing services. The memorandum describes the taxation of virtual currency received in the “crowdsourcing labor market”—for example, for performing microtasks or other projects—but its principles are applicable much more broadly.
The IRS memorandum was quietly made public on August 28. It is a reminder that the IRS continues to receive requests for additional cryptocurrency tax guidance. In the memorandum, the IRS lays out its view that convertible virtual currency is “property” for federal tax purposes, and that its receipt in exchange for performing services gives rise to gross income. But let’s look a little deeper at the IRS’s reasoning. For starters, the IRS memorandum poses the following question:
Myth No. 1
There is no need to report any gain or loss for exchanges between one cryptocurrency and another if the transaction occurred before January 1, 2018. That is not true. Every time when you sell a cryptocurrency, whether for fiat currency or another cryptocurrency (e.g. sell Bitcoin for Ethereum), you need to report the transaction and calculate gain or loss for tax purposes. Many people thought an exchange between two cryptocurrencies qualified for section 1031 like-kind exchange if it was done before January 1, 2018. Under the new tax law signed by the President on December 22, 2017, only real property qualifies for section 1031 like-kind exchange tax treatment starting 1/1/2018. However, it does not mean that cryptocurrency qualified for like-kind exchange tax treatment before the new law kicks in. There is no tax law, old or new, supports the conclusion that cryptocurrency ever qualified for like-kind exchange tax treatment. People taking such position are at risk for losing their battle with IRS.