Cryptocurrency poses a significant risk of tax evasion.
The Biden administration intends to crack down on tax evaders, and Bitcoin is a topic of discussion.
Virtual currencies like bitcoin and ethereum, which are worth approximately $2 trillion combined, give investors a method to avoid paying taxes on their earnings.
As a result, the crypto economy contributes to the “tax gap” in the United States, which is defined as the difference between taxes paid and taxes owed, according to the Treasury Department. Over the following decade, the White House predicts a $7 trillion deficit.
The Treasury appears to be particularly concerned about rich Americans who transfer taxable assets to the crypto economy in order to avoid paying taxes.
According to a Treasury study released last week that described the Biden administration's tax-compliance objectives, “cryptocurrency already represents a serious detection difficulty by promoting illicit activities broadly including tax evasion.”
Crypto tax evasion
But how does cryptocurrency contribute to tax avoidance?
According to tax experts, it all boils down to inadequate reporting standards.
If exchanges, corporations, and other third parties fail to record crypto revenue or transactions, the IRS may be unable to track them. As a result, the income may be exempt from taxation.
According to Jon Feldhammer, a partner at law firm Baker Botts and a former IRS senior litigator, “no one has put out clear regulations on it, so there's a lot of non-reporting going on.”
“Any time you create a path of non-reporting, you create a way to profit from tax fraud in an untraceable or much more difficult-to-trace way,” he said.
As more establishments accept bitcoin and other virtual currencies as payment, crypto is quickly becoming a viable alternative to cash. Cash, on the other hand, is more tightly regulated.
A company that gets more than $10,000 in cash from a customer, for example, is required to file a currency transaction report. This may happen if a customer pays more than $10,000 cash for a car, if someone wins big at the casino, or if a bank makes a large cash deposit.
These reports inform the government that a buyer has a significant amount of cash that may or may not be reported on a tax return.
However, when it comes to cryptography, the same laws do not apply. A used-car dealership that receives $20,000 in bitcoin from a customer is not required to file a currency transaction report, and that revenue may go untaxed if it is not declared on the business owner's tax return, according to Feldhammer.
“Despite accounting for a modest percentage of corporate revenue today, cryptocurrency transactions are expected to grow in importance over the coming decade, particularly in the presence of a broad-based financial account reporting regime,” according to the Treasury research.
Furthermore, because virtual currencies do not need to be purchased or sold through an exchange, they are less transparent to government officials.
Biden crypto proposal
Underreported income accounts for over 80% of the “tax gap” in the United States, primarily among the rich who hide money in complex structures, according to the Treasury Department.
Stronger reporting criteria, such as "complete reporting" for cryptocurrency, are one of the most effective strategies to increase tax compliance, according to the paper.
Biden's tax plan would treat cryptocurrency transactions like cash, forcing firms to register any virtual currency transactions worth more than $10,000.
Financial institutions, payment settlement firms, as well as digital asset exchanges and custodians, would be compelled to record cryptocurrency transactions exceeding a particular level, according to an analysis of the proposal published by law firm Greenberg Traurig.
The IRS has already expressed an interest in learning more about taxpayers' bitcoin activities, including including a question concerning cryptocurrency holdings on page 1 of 2020 tax returns.
Congress would have to approve Biden's compliance agenda. According to Treasury, the overall plan would raise $700 billion in the first decade and $1.6 trillion in the second.
The cash would be used by the White House to fund provisions in the American Families Plan. Additional money for two years of free universal pre-kindergarten, two years of free community college, significantly subsidised child care for middle-class families, federal paid family leave, and enhanced child tax credits are included in that proposal.
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