Cryptocurrency, cripto and the IRS

Does your Twitter, Reddit, Facebook, Instagram or other social media feed feature photos of your new sports car, boat, fabulous vacation or the beach house that you bought with your crypto gains? Do you also report a low income on your taxes?

You wouldn’t be alone if you were bragging about your crypto riches on social media. But you should know that the IRS is watching. They want their piece of your crypto gains and they’re stepping up their search.

Testifying before the Senate Finance Committee, IRS Commissioner Charles Rettig said that the country is losing about a trillion dollars every year in unpaid taxes. He credits this growing tax gap, at least in part, to the rise of the crypto market. 

However, as an accountant with a specialty in crypto taxation, I can vouch for the fact that the IRS hasn’t exactly made it easy to understand how to report this information without professional assistance.

Ever since 2013 when it was reported that the IRS was tracking private emails and social media, the IRS has been somewhat coy about their methods. Back then, they said  they were monitoring in order to glean any information that might lead to or support an audit. A public outcry predictably arose and the IRS initially denied these reports.

But currently, their own documents, including IRS social media policy, IRM 10.8.27, make clear that they do, in fact, monitor social media along with medical records, credit card statements, property ownership and more. The IRS also pays a reward of up to 30 percent of the government’s recovery for certain whistle-blowing.

What IRS agents are allowed to search

IRS employees are allowed to search for publicly available information on the internet, including publicly-available social media information, to perform tax compliance-related work. This research may include locating taxpayers, identifying assets subject to seizure or levy actions, and identifying other possible unreported sources of income.

While they can search, and read social media content, they can’t be logged into their personal or government social media account while doing so. They may not obtain information from websites for compliance-related work by registering with a fictitious identity. They also aren’t allowed to “friend”, “like”, “follow” or “connect” with a person or business.

That’s a far cry from preventing IRS or Treasury Inspector General for Tax Administration (TIGTA) employees from monitoring your social media. They are free to look as long as they do not log in to your social media account with their personal or government computer or phone. They also are not required to disclose that any type of investigation is underway. Rules change to become even more permissive when there is an active criminal  investigation relating to a possible referral from the audit division.

If, for example, your website or blog links to and displays your latest Tweets, an IRS agent can access the information without being logged into Twitter. He/she may obtain information that is available from the Tweets

Or, if a Google search on your business name shows a social media account with your name, the agency can look at the profile and social feed. Just put your name into Google search and if you are active on Twitter, you’ll see your most recent Tweets high up in the results.

One does not need to be logged into Twitter to read the rest of your feed. If the feed contains a hashtag, #crypto for example, the agent can click on the hashtag to see if any other relevant information turns up.

It’s easy to be an unintentional crypto tax cheat.

The biggest issue driving noncompliance is the tangled web of tax rules surrounding digital currencies. These are still being worked out, and are in a state of constant flux.

If you trade through a traditional brokerage, you typically get a Form 1099-B detailing  your transaction proceeds for the year. That doesn’t always happen in the crypto world, because not all crypto exchanges are reporting information to the IRS. The law is changing under the Cares Act. And, given the volatility of the crypto market, it is often difficult to determine the cost basis. That’s the price for which crypto was originally purchased, plus any transaction fees you paid.

When it comes to crypto, it is not exactly clear to the public what constitutes a reportable event. If you buy Crypto Punk with your ETH is that a tax return reporting event? (yes)!If you buy a TV with dogecoin is that a tax reporting event? (yes!)

To the IRS, crypto is an asset, just like any other. Using crypto to buy something is the same as liquidating it or selling any other property to buy something. When that asset changes hands – either by sale, swap or as a gift – this is known as a disposal. If there is a profit at the point of disposal, the profit can be taxed as a capital gain or ordinary income.

 Beware the “soft letter”

In 2019, the IRS announced it was sending “soft” letters to more than 10,000 people who potentially failed to report crypto income. “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS commissioner Charles Rettig in a statement.

These letters become increasingly strident, and should not be ignored. In the most extreme cases, you could face any or all of these:

  • prison time and a fine of up to $250,000,
  • a penalty of 75% of involved underpaid tax
  • an understatement of estimated tax penalty
  • other penalties and interest on the amount of underpaid taxes and penalties
  • related state and local income taxes, penalties and interest.

The IRS  has issued a variety of reports intending to clarify crypto taxation for US taxpayers, including forty-six FAQs and a sixteen question FAQ. Unfortunately, they are published on the IRS’ website, which is almost never read by US taxpayers.

If all of this has not curled your hair, you should know that in addition to the Internal Revenue Service , many federal agencies monitor social media, including  the SEC, DHS, the FBI, the state department, the Drug Enforcement Administration (DEA), the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the US Postal Service, , the US Marshals Service and the Social Security Administration (SSA), etc. ©