Cryptocurrency has gone from an experimental type of digital money to being recognized by many as a currency with real value. Many Americans have invested in these new types of asset classes; however, majority have not provided the data needed to report their investments to the IRS. A New Study released by the Financial Watchdog Group examined roughly 1.34 billion tax returns and found 92.5% of the investors had no records of reporting crypto sales to the IRS.
The Staggering Scope of the Tax Gap
When examining the reality of digital compliance, leading researchers in the field—Jeffrey Hoopes, Tyler Menzer and Jaron Wilde—have put together a comprehensive research paper in an effort to find out how many people are really complying. Their research indicates that between 2013 and 2021, a little over 17 million “sales” of cryptocurrency were filed by the IRS; however, independent studies suggest that the actual number of Americans with digital assets could exceed 54 million. Therefore, there is a high likelihood that many people are not paying taxes on cryptocurrencies they own or have sold. The Department of Treasury has estimated that between $50 billion and $60 billion in taxes are owed to the Treasury by U.S. citizens due to non-compliance.
Profiling the Everyday Crypto Trader
Not only did researchers measure how much money was lost but they also produced an accurate representation of who is actually filing correctly, and what they found was surprising! The data clearly shows that the majority of individuals who are reporting digital income appear to be young (34 years old on average), and that their trading style is much closer to the speculative and volatile purchasing behaviour exhibited by retail “meme” stock investors than it is similar to the stable and strategic holding patterns used by traditional institutional traders. Furthermore, the data showed a massive spike in compliance starting in 2019, simply because the IRS decided to add a direct virtual currency question to the standard Form 1040.
A Global Crisis of Noncompliance
While the American numbers are alarming, this is a worldwide phenomenon. Global data indicates that an incredibly small fraction of international crypto owners—roughly 1.76 percent—formally declare their holdings. Japan currently leads the developed world with a compliance rate hovering near 20 percent, followed by Norway and Germany. Meanwhile, the United States continues to lag far behind. In many European and Nordic countries, targeted financial analyses reveal that over 90 percent of digital asset investors keep their transactions completely hidden from local tax authorities.
The Enforcement Era and Form 1099-DA
The era of digital anonymity is rapidly closing. The Internal Revenue Service is launching its most aggressive enforcement shift yet with the introduction of Form 1099-DA. Starting this tax year, cryptocurrency brokers and exchanges are legally required to report the gross proceeds of every single user sale directly to the federal government. Due to this significant change, digital trading platforms will now need to adhere to traditional brokerage reporting requirements and the agency will now have direct access to previously undisclosed wallets.
What Investors Must Do Next
The international landscape is changing quickly with governments tightening rules and regulations surrounding the use of digital assets. For example, the IRS has started using artificial intelligence to monitor blockchain transactions, making it increasingly difficult to operate anonymously. Recent surveys show there is still a significant number of users who are not aware of the new broker reporting rules, even though they know that digital assets are subject to taxation. As the federal government also uses automated technologies (e.g., software) to capture trading data, the average investor has a decision to make; either act now to align their personal records with federal tax requirements, or risk being caught and facing both civil (e.g., fines) as well as criminal (e.g., imprisonment) consequences later when the automated auditors catch up with them.
