NODE40, the specialist blockchain accounting firm behind the Balance cryptocurrency reporting software, believes the IRS will receive a record number of crypto-related tax returns this year as investors take advantage of market falls to offset losses against other tax liabilities.
The number of crypto-related tax returns is likely to be far higher than the 800-900 taxpayers that claimed cryptocurrency gains between 2013 and 2015. However, NODE40 has warned that, while revealing losses will be advantageous this year, the decision could have long term consequences for investors.
“It is clear that, with the huge falls in cryptocurrency markets during 2018, many people will be weighing up whether this is a good opportunity to reveal the losses they have suffered. In doing so, they will be looking to take advantage of these losses in order to offset other tax liabilities. Having not reported their crypto activity up to now though, those choosing to reveal losses this year will need to report their crypto positions every year from now on, giving the tax authorities much better visibility of people’s crypto involvement,” said Perry Woodin, Co-Founder of NODE40.
Earlier this year, Coinbase revealed that the IRS is trying to access 13,000 Coinbase customers records, in order to crackdown on people’s crypto-related tax liabilities. Individuals will have to decide by the end of the year whether they will declare their crypto activity to be counted in this year or not. If they do and losses are high, they may be questioned about where the money came from.
“There is a lot for individuals to consider when it comes to crypto accounting and their tax returns,” said Sean Ryan, Co-Founder of NODE40. “For example, ‘hodlers’ will have a completely different set of circumstances to traders, while those receiving crypto from forks and then selling will also have a unique situation to deal with.”
There could be stiff penalties in place for those found to be in violation of tax law. Paying taxes based on inaccurate calculations falls under Sec. 6662 and could result in penalties of 20% or up to 40%. In US Tax Courts, the burden of proof generally falls to the individual and not the IRS. This can be shifted with supporting documentation – using software that can retroactively generate an audit trail for individuals. For this reason, it’s important tax filers have a written record of all transactions they took part in along with proper cost basis assignments and accurate gains or losses recorded.
Burden of Proof
The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.
Individuals intending to file losses this year are advised to seek out crypto-accounting software that has capabilities to: 1) Recover historical trade activity, 2) provide cost basis reasonable enough to stand up to the Penalty for Misstatement of Asset Value or Pension Liability paragraph of section 6662, 3) track activity across multiple exchanges and wallets, and 4) provide a detailed audit trail of each and every calculation ready to be handed to the IRS should they ever come knocking.
Then and only then should one decide how to proceed. “I suspect a lot of people will be surprised at exactly where their true liability falls. I doubt very much anyone’s gut feeling is remotely close to accurate,” said Sean Ryan, Co-Founder of NODE40.
NODE40’s prediction comes at the same time as calls from an advisory committee of the IRS, which urge the agency to provide additional guidelines for the taxation of crypto transactions. These guidelines would be expected to update the agency’s commentary of 2014, which specified that digital currencies should be treated as property.
NODE40 Balance is a robust cryptocurrency reporting software that integrates directly with major cryptocurrency exchanges. Members of the blockchain community transacting in, trading, or mining digital currency, have likely triggered a taxable event and can be unaware of how to properly disclose these transactions to the government. For more information, please visit: https://www.node40.com/balance/