The popularity of cryptocurrency has been on the rise for years. But 2020 has been a very special year with many more retail investors getting exposure to bitcoin during the COVID-19 lockdown, public companies like MicroStrategy
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Increased Crypto Tax Awareness
In 2021, 150 million American taxpayers will be asked at the top of the front page of IRS Form 1040: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. This will also make cryptocurrency taxes which was once a niche subject a more mainstream area of taxation that all accountants need to be aware of.
IRS Needs To Catchup With New Developments
The cryptocurrency space has rapidly evolved since the IRS issued the original virtual currency tax guidance back in 2014. Novel concepts like staking, yield farming, and various Decentralized Finance (DeFi) transactions are left unaddressed by the existing IRS guidance. With Ethereum (second largest cryptocurrency), transitioning from Proof of Work (PoW) to Proof of Stake (PoS) consensus, there will be increased pressure on tax regulators to review existing generic guidance and introduce more specific guidance. Specifically, we might expect to see additional IRS guidance around DeFi transactions in 2021.
Exchanges Will Face Pressure to Tighten Information Reporting
Currently, tax information reporting among crypto exchanges is not standardized. Some crypto exchanges issue Form 1099-Ks while some have opted not to issue any forms or issue other forms like 1099-Bs and 1099-MISCs. Form 1099-Ks have caused considerable confusion among taxpayers and lead to CP2000 tax notices. In 2021, we can expect cryptocurrency exchanges to be under more scrutiny by the IRS and other watchdogs (e.g. OECD) and face a lot pressure to comply with more comprehensive and uniform reporting standards.
More Crypto Tax Evasion Cases
During 2020, we saw multiple high-profile tax evasion cases related to cryptocurrency including the indictment of John McAfee and Amir Bruno. As the next year unrolls, expect the IRS to initiate more action against people attempting to evade taxes on their cryptocurrency or fraudulently underreporting cryptocurrency income.
It has been an amazing ride to watch the crypto space grow over the past decade, and it will be interesting to reflect on these predictions one year from now.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.