Perspective by: Robin Singh, CEO of Koinly
As the conflict between regulation and Bitcoin (BTC) reaching all-time highs unfolds, it’s clear that tax authorities will enhance their cryptocurrency tracking systems long before Bitcoin touches the $1 million mark.
Cryptocurrency investors shouldn’t get too comfortable or believe they can evade scrutiny until that monumental price occurs. Along with their intense focus on the future, these agencies are becoming adept at examining past transactions. Many regions have the authority to revisit previous years, and if tax bodies discover significant unreported gains, they are unlikely to overlook them…
This could lead to issues for uninformed Bitcoin users who have begun to cash out their earnings.
Tax authorities will advance through automated data sharing
Governments remain in a peculiar situation where cryptocurrency tax regulations can shift at any moment. Take the U.S. Internal Revenue Service (IRS) as a case in point. Starting in 2025, the IRS will require investors to employ the wallet-by-wallet cost tracking method, effectively eliminating the previously used universal wallet method. The latter required more effort but provided the IRS with more of the data they seek.
While the extent of automated data sharing with tax agencies may not yet match that of traditional stock market data, it’s only a matter of time before cryptocurrency data from centralized exchanges comes full circle. Several exchanges, such as Coinbase and Binance.US, submit Forms 1099-MISC to the IRS for users accumulating over $600 in rewards within a single fiscal year.
The end of the honor system
Then there’s the global dilemma, with each tax agency worldwide adopting its own unique strategies. For instance, the Australian Tax Office (ATO) utilizes automated stock cost and sale reporting through pre-filled data for taxpayers. However, crypto information is not included in these pre-fill reports.
Instead, any activity on a centralized exchange triggers an alert on the taxpayer’s return, demonstrating that the ATO is aware of potential crypto transactions. This places the onus on the taxpayer to accurately report any capital gains or losses accrued during the financial year.
Whether you engage in trading or merely acquire crypto, repeated alerts spanning multiple years without corresponding reports from the taxpayer may heighten the chance of an audit.
The global honor system is nearing its end. Once tax authorities refine their cryptocurrency monitoring capabilities, they could potentially conduct retrospective reviews of earlier years. The ATO already engages in a robust data-matching program with centralized exchanges within its jurisdiction.
If you value your peace of mind, enduring a multi-year audit of your cryptocurrency activities is the last thing you want. Every tax authority is catching up, and accountants are keen to help clients avoid unnecessary issues as compliance strategies evolve.
Tax authorities poised to enhance collaboration in the coming years
In the years ahead, we can expect an uptick in global tax data exchange between countries, a trend that is already underway. In March 2024, the governments of Australia and Indonesia finalized an agreement to share tax information, with a salient focus on cryptocurrency usage.
A few months prior, in November 2023, 47 countries including the United Kingdom, Brazil, Germany, and Japan committed to the Crypto-Asset Reporting Framework (CARF) and aim to implement information exchange agreements by 2027.
Recent: Indian cryptocurrency holders face a staggering 70% tax penalty on undisclosed gains
Don’t assume that decentralized finance and non-fungible tokens are escaping attention. Tax authorities are keenly aware of the profits generated on decentralized platforms. Agencies such as the IRS have already laid out guidelines for collecting user data from non-custodial brokers, though this initiative has been postponed until 2027.
While tracking might present more difficulties, and some investors feel their assets are untraceable until moved to centralized exchanges, tax authorities are already adapting. It’s not a situation where the crypto industry holds all the answers. Tax bodies are enlisting experts from the cryptocurrency sphere to help them understand how individuals might attempt to circumvent regulations.
Perspective by: Robin Singh, CEO of Koinly.
This content is intended for informational purposes only and should not be construed as legal or investment advice. The viewpoints expressed here are solely those of the author and do not necessarily reflect the views or opinions of any other entity.