Until recently, many people thought that purchases and money transfers made with cryptocurrency were safe and secret. The convenience and anonymity led many people—including criminals—to use it for shady and illegal deals—such as profiting from illegal porn and drug transactions. Others thought they could profit and never have to report it to the Internal Revenue Service (IRS). Now the agency has found a way to crack the code and learn about those supposedly secret deals.
Cracking the Cryptocurrency Code
Cryptocurrency created a way to transfer assets (money) without revealing someone’s identity. The system used keys that identified individuals, and unless the buyer or seller revealed their name, it was a secret transaction—and many hoped it would stay that way.Every cryptocurrency uses a blockchain system. In it, ledgers are created with every transaction carefully recorded. They are permanent and cannot be changed once entered into the system. The information also cannot be erased or replaced, which gives the IRS good data to base a case on—if it can crack the code.
Advantages of Cryptocurrency
The main idea behind cryptocurrency is that it eliminates any centralized banking system (government control), but can still permit nearly instant and inexpensive methods of transferring money. It has many legitimate uses, BraveNewCoin says, besides enabling private transactions, including protection from your cash accounts being frozen by the government, letting you invest in new business startups, travel anywhere, buy some luxury cars, and more.Crypto gives you several advantages over other financial methods of transferring money. When using a bank, it can take up to five days to complete a transaction. Transactions using crypto are completed very fast and do not require verification by a third party. It also enables you to transfer money to most places worldwide. Earnings from crypto trading can exceed more than 10 percent—at times.
Paying for Codebreakers
A couple of years ago, Forbes reported that the IRS was willing to pay up to $625,000 to people who could crack Monero or Lightning and get useful information. The IRS became suspicious when many people did not report any income or earnings from cryptocurrency between 2013 and 2015. The number of people reporting any income had actually dropped during that period. It resulted in the current crackdown.Tax on Cryptocurrency
Whenever you make a gain on your crypto transactions, the IRS will know about it. Crypto companies are required to report to the IRS on a 1099 anyone that has made a gain on their accounts. According to Engiven, the IRS summoned Coinbase between 2013 and 2015 to find out about its customers. With this information, the IRS determined that about 10,000 people had failed to report their crypto profits.Failing to provide accurate crypto tax reporting to the IRS could result in fines or jail time. There is a maximum penalty of five years for tax evasion and a fine of $250,000—or twice the amount of taxes owed.
How to Avoid Crypto Taxes
Even though no one likes to pay taxes, there are ways to do it safely without being concerned about the IRS looking over your shoulder. Buying crypto through a retirement account can give you the break you need. Buying crypto inside a traditional IRA (you may need to get a self-directed IRA to do this), EscapeArtist says, will enable you to avoid taxes until you start taking distributions. If you buy crypto from inside a Roth account, you will not pay any taxes on the distributions because contributions to Roth accounts are made after-tax.The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.