Starting this month Kraken that they will be sharing their customer data with IRS. Internal Revenue Services has targeted multiple crypto exchanges and company in 2021 for user data sharing. Many exchanges gave in to the demands and already agreed to share the user data. Kraken was among the exchanges that didn't easily agree to the demands and did chose to fight in courts. This battle was lost from the beginning. IRS was going to win anyway. It is rare for IRS to lose such legal fights. They want the money, and in most cases courts would side with them, in my opinion. After losing the legal battle in the summer of June, now has come the time to actually comply with the courts orders for Kraken. I am impressed with Kraken's actions though. They stood their ground, and I doubt sharing user data will go against them as a business.
I have never used Kraken. While the exchange operates in the US, they are not present in the state I am. That's why I don't really have an opinion about Kraken as an exchange. There aren't any exchanges I like. Most I have heard of or used like Coinbase, Bittrex, Binance have not be impressive. They haven't really done anything to show they care about the underlying technologies and decentralization. Perhaps Kraken is the same, or maybe not. But their fight for the user data and privacy shows they deserve a respect.
It is not news that IRS have been taking actions to collect all the taxes they can from crypto gains. Their job is to collect taxes, I guess that is what they are supposed to do. However, as separate agency and a part of collective bureaucratic machine of the government IRS has also failed. It seems there is a massive disconnect among government agencies and institutions when it comes to crypto. Crypto is not a new technology anymore. It is a widely known, have been around for more than a decade, and there are no shortage of experts in the field. Yet, we still live in a world where there is not clarity when it comes to defining crypto assets, their tax designation, and clear guidance of taxable events. Congress has failed massively regarding crypto, there is no hope there. I don't know what SEC is doing, doesn't make sense. At least with IRS we know the motives, generating as much income as possible in the form of taxes. However, utilizing a little bit of the same energy, motivation, and resources they too can take steps that are also beneficial for the public. I am talking about clarity. IRS is a powerful and influential agency. If they want they can make a significant impact in the space. That way, at least it would look like they are earning the money they are collecting.
I am not saying IRS shouldn't be collecting taxes. I am not against all taxes, not even crypto ones. I do believe there is benefit in some taxes. But also, I think many taxes just don't make sense. For example, property taxes. I don't understand the logic behind it. Just another way to extract money. That is not the point. We like it or not, we agree or not, taxes are reality. Even before crypto, general rule has been you make money you pay taxes, doesn't matter how you made the money. Similarly, if someone created income by being involved in crypto, they probably have some tax obligations. I guess it would depend in various individual situations. But in general, there income, there are taxes. It is individuals responsibility to report their taxes.
There was a time when IRS didn't pay much attention to e-commerce transactions and taxing various online marketplaces. Then they came up with a way to make platforms to comply with sharing data on transactions, and this would allow IRS identify certain accounts and/or individual and collect taxes if they thought they haven't been paying. In some situations, they would just send out bulk letters for people to pay taxes on online transactions even though they have already paid. Now, some of these taxes and paperwork might get confusing, and I wouldn't be surprised if there were those who paid the demanded taxes even though they didn't owe any. I have seen some of these letter, and those who disputed the claims and managed to fix their tax situations without needing to pay anymore. For example, if you have over $20K of transactions on one of the e-commerce platforms, and IRS didn't have specific records in the files, they would automatically consider the total amount as profits. That would be further than true in many cases. All transactions are almost never equal to all profits. There are obviously costs and expenses to be considered. Some individual merchants might end up even in negative or receive tax returns depending on their specific situations.
It seems to me IRS has been utilizing the same strategy with crypto exchanges or companies. They want to see the data, who is using the exchanges, how much are they transacting, etc. If the total value exceeds $20k, they probably owe taxes. This too is oversimplification. Just because a customer had over $20k value of transactions doesn't automatically mean they have made the same amount in profits. In some cases, they might actually be losing. I don't know what exactly exchanges are sending to IRS, if it is bulk data sent, or if they only respond the specific requests. Most like, if not now, down the road IRS will be getting all the data they need. Why not? Extra data won't hurt. Especially, this is a free data that can generate more income in the form of taxes and penalties.
IRS has been active seeking data on crypto for a while now. They ask the crypto questions in the tax forms. They have been doing that for few years now.
A few years ago IRS decided to ask individuals filing their tax returns about their involvement in crypto. They have added a question in 1040 form, and it would read as following:
At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?
The IRS started asking this question in 2020 and continued to ask the same question in 2021. The answer to the question doesn't necessarily directly change anything about the tax return. Even without this question, it has always been individual's responsibility to declare all income, crypto or otherwise. However, it did emphasize that IRS was serious about collecting taxes on income from crypto.
Taxes on crypto still remain confusing to this day. Not only because government agencies are too slow to clarify things, but also because crypto world is confusing as well. Not all assets have the same characteristics, not all blockchain networks function the same, and there are many types of activities in crypto that may be debatable wether they are taxable events.
Last tax season IRS had a surprise crypto question once again. But that time they have completely changed the question. The new question on 1040 read as following:
Digital Assets: At any time during 2022, did you:(a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.)
The biggest change was the change in wording of the crypto assets. In the previous forms crypto assets were referred to virtual currency. After the change they were calling them digital assets. Perhaps that is a better wording that would include all crypto assets, because not all assets can be used as currencies. For example NFTs.
IRS became a little bit more specific with their questions and they tried to define what actions can be receiving digital assets and what actions can be disposing of digital assets or financial interest in digital assets. The IRS took one more step further with more detailed instructions about digital assets question which also defines what digital assets were.
Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.
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Perhaps the questions in tax forms will change again, when the next tax season arrives. That too is annoying. It seems like they are figuring things out as they go. While there are some attempts to clarify things, continues changes add more layers of confusion. IRS is not stopping here when it comes to collecting taxes from crypto incomes. That is clear. Now if they could get more comprehensive approach, try to introduce more clarity not only for the tax payers, but also to other government agencies and institutions. We are still far away from anything comprehensive when it comes to clarity regarding crypto from governments stand point. Those government entities who are actively involved in studying and analyzing the tech and space, could be in a better position to shed more light into the matter. This way, we would be able to say, taxes well earned.
Moreover, while the goal is to create more income for the government, another great approach for the US government would be to utilize the bitcoins they have as an investment. US treasury has a lot of bitcoins. If they too become a hodler, they may become one of the best investments they have made. Who knows, maybe it would help paying off the national debt.