IRS enforcement initiative “Operation Hidden Treasure” to mine for unreported crypto income

The agency’s efforts will focus on cryptocurrency-related failure to report income that may result in civil or criminal liability.

Virtual currencies like Bitcoin, Ethereum or Litecoin exist digitally in intangible units called coins or tokens on decentralized ledgers. Despite the name “currency,” governments do not issue them. When people subject to U.S. taxation authorities engage in crypto transactions resulting in taxable income or gain, the IRS requires reporting and payment.

Taxable transactions involving digital currency may include digital sales, exchanges, investments, and purchases of goods or services.

Virtual currency may be intangible, but it will show up on the IRS radar

Now is the time to sit up and take notice if you dabble in – or invest in or use like money – crypto assets, especially if you have not reported potentially taxable related income or gain to the IRS. On March 5, 2021, the director of the new IRS Office of Fraud Enforcement Damon Rowe announced the kickoff of Operation Hidden Treasure, an initiative to uncover unreported taxable gain from digital currency transactions, according to Forbes.

How will the IRS find the hidden crypto treasure?

The director shared this information at a virtual meeting of the Federal Bar Association (FBA). The agency is investing significant assets into prioritizing the capture of unpaid tax related to digital transactions and crypto mining operations. A dedicated team of agents will specialize in virtual assets and in uncovering unreported digital income or gain that may result in civil or criminal liability, including for tax evasion.

The government is also working with sophisticated, specialized vendors to help identify digital patterns and signatures that could indicate an attempt to cover up taxable gain.

IRS updated FAQs on virtual transactions

Shortly before this announcement, the IRS appears to have updated extensive FAQs on its website about digital currency transactions involving virtual currency held as a capital asset, which the agency treats as property for tax purposes. Important topics covered include cryptocurrency sale or exchange, gifting, donation, forms, reporting requirements, capital gains and losses, basis and valuation, virtual currency as wages or in self-employment, ordinary income, holding periods, hard and soft forks, recordkeeping and others.

Several tax professionals interviewed by Bloomberg Tax, however, described how the FAQs do not clarify all related issues and may even be confusing, especially since the update was so close to the April 15, 2021, filing deadline. This underscores the importance of consulting with an informed tax attorney as soon as possible about how to proceed.

Legal counsel imperative for those with crypto assets

The complexity of these relatively new federal tax issues and the IRS announcement of Operation Hidden Treasure are important reasons for anyone involved with cryptocurrencies for investment or who uses them like regular currency to talk to an experienced tax lawyer immediately. The attorney will be able to do a deep dive into the client’s historical virtual currency usage and ownership and provide advice about how to handle unreported or underreported taxable gains. There may be a variety of options for how to resolve the matter.

Avoiding these issues can be expensive. Civil penalties for tax fraud can be 75% of unpaid tax, while if the failure to pay tax was willful, a criminal conviction can result in incarceration and high fines.

Time is of the essence as the agency is intentionally shining a spotlight on mining operations that are not as far underground as some may think.