If you hold cryptocurrency (Bitcoin, Ethereum, Dogecoin and all the others) but owe money to the taxman, your crypto assets could be confiscated to satisfy outstanding tax debt that hasn’t been repaid. In a notice filed in 2014, the U.S. Internal Revenue Service (IRS) states that crypto is to be viewed as property and not currency for tax purposes. This notice paved the way for the IRS to seize crypto assets to settle unpaid taxes.
The IRS has since contracted TaxBit, a Utah-based crypto tax service provider, to help with auditing crypto transactions by checking and verifying accurate tax reporting by high-volume traders.
Are Cryptocurrencies Classified as Property by the IRS?
The 2014 notice classifies Bitcoin and other cryptocurrencies as property from the perspective of federal tax law. Since the agency treats virtual currency as property, all transactions using virtual currency now have the same general tax principles applied to other property transactions.
According to Robert Wearing, the Deputy Associate Chief Counsel for Procedure and Administration at the IRS, “The IRS will seize that property and will attempt to follow its usual procedures to sell it and use it to satisfy collection (if the taxpayer fails to meet their tax obligations).”
How Does the IRS Obtain Data on Cryptocurrency Users?
The following are some of the ways the IRS can obtain information on your crypto holdings:
- 1099-B and 1099-K: If you ever received a form 1099-K and 1099-B from a crypto exchange, the IRS knows you have reportable crypto transactions. They leverage a matching mechanism integrated into the IRS Information Reporting Program (IRP) to track these transactions.
- Subpoenas: The IRS has also issued several subpoenas to crypto exchanges ordering disclosure on some user accounts. In 2018, Coinbase was forced to reveal thousands of user accounts for tax verification purposes.
- Schedule 1 questions: As of 2020, every taxpayer has to answer Schedule 1 virtual currency questions that seek to ascertain whether you received, sold, sent, exchanged, or acquired a financial interest in any virtual currency.
What Are My Tax Relief Options If I Can’t Pay Off My Tax Debt?
If you have a tax debt that you cannot pay in full, the following are some ways to find tax relief so that your virtual currency and other digital assets or property aren’t seized:
- Offer in Compromise (OIC): You have an option to settle your accrued tax debt for less than the full amount due. The IRS typically approves Offer in Compromise when the amount offered represents the most they can expect to collect within a reasonable period of time.
- Hardship Status: You can also request “Currently Not Collectible (CNC)” if you cannot make payments due to your current financial situation. Before the IRS places your account in CNC status, it may ask you to file past tax returns.
- IRS Payment Plans (Installment Agreements): You can also enter into a payment agreement with IRS that allows you to pay off the tax debt in manageable monthly payments.
How Can Wiztax Help?
If you owe taxes for a single year or multiple years and you’re unable to pay off your tax debt, Wiztax is ready to help. Our online system built by experts with decades of tax law and IRS experience will make sure you are qualified for the best tax relief option for your current financial situation.
6 Simple Questions. Free Evaluation.
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