Crypto investors paying only half of taxes

Cryptocurrency investors are collectively not paying the IRS at least half of the taxes they owe on their virtual-currency trades, according to new analysis from Barclays.

A research note by Joseph Abate, a managing director at Barclays, paints a picture of an exploding new industry that the Internal Revenue Service is struggling to hold to account.

The U.S. tax agency hasn’t released any recent estimate of its own on the difference between the levies owed and those paid on a self-reported basis. So Abate, a veteran analyst of money markets and Treasury Department funding, extrapolated from a 2017 IRS calculation to find the current tax gap would be around $50 billion per year — accounting for about 10% of all unpaid taxes.

Abate’s estimate doesn’t include newer decentralized finance, which includes mining, staking or participating in liquidity pools.

Bottom line, in the crypto sphere: “It is difficult for the IRS to figure out who owes taxes.” That’s because all counterparties are anonymous, even if visible on blockchains.

The crypto challenges are part of a broader, and growing, challenge. IRS Commissioner Chuck Rettig that the total tax gap is significantly larger than previous agency studies have found. Rettig told the Senate Finance Committee last year the shortfall — spanning crypto, capital gains and all other levies — may be as high as $1 trillion a year, or several times what previous estimates concluded. He attributed the jump in part to crypto.

The IRS has already begun to crack down on tax evasion among crypto investors, and in 2023 will begin requiring brokers to report transactions worth at least $10,000 to the agency. The IRS has also increased enforcement activity and is working with tax authorities in Australia, the U.K., Netherlands and Canada to investigate financial crimes.

Increased attention to taxing crypto transactions is part of a sharper focus on regulating the industry. Lawmakers and regulators this week renewed calls for new rules after a popular stablecoin lost its peg to the U.S. dollar, putting investors and the market more broadly at risk.

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