Perspective by: Robin Singh, CEO of Koinly
The competition between regulatory measures and Bitcoin’s potential to reach all-time highs indicates that tax authorities are likely to enhance their crypto-tracking methods well before Bitcoin achieves the $1 million milestone. Investors in cryptocurrency should not become too relaxed or think they can evade scrutiny until Bitcoin hits that price level. While they’re focused on future gains, they’re also becoming adept at examining historical transactions. Numerous jurisdictions possess the authority to look back at previous years, and if tax officials discover significant unreported income, they are unlikely to overlook it.
Tax agencies advancing through automated data collection
We’re currently in an uncertain phase where cryptocurrency tax regulations can change unexpectedly. Take the IRS in the United States as an example; starting in 2025, it will require investors to apply the wallet-by-wallet cost tracking method instead of the more straightforward universal wallet method. Although the latter is much less tedious, it provides the IRS with the detailed data they seek.
Though the extent of automated data sharing with tax agencies may not yet match that of stock market data, it’s only a question of time before centralized exchanges begin providing detailed crypto data. For instance, platforms like Coinbase and Binance.US are already applying Forms 1099-MISC for users who receive over $600 in rewards within a year.
The end of the self-reporting era
Moreover, there’s the international challenge wherein each country’s tax authority adopts its own strategies. For instance, the Australian Tax Office (ATO) facilitates automatic stock cost and sale reporting through pre-filled data for taxpayers. However, the crypto transactions remain outside these pre-fills. Any centralized exchange activities will notify the ATO, making it evident to the taxpayer that their crypto dealings are under observation. This puts the onus on taxpayers to accurately report any capital gains or losses that occur within the financial year.
Regardless of whether you’ve made sales or simply purchased crypto, regular alerts over multiple years without corresponding reports will likely heighten the chance of an audit. The global honesty system is approaching its end. Once tax agencies refine their crypto monitoring capabilities, they might retroactively investigate past years at their discretion. The ATO already runs a fairly rigorous data-matching initiative with centralized exchanges operating in Australia.
Growing cooperation among tax authorities in the future
In the coming years, we can anticipate an uptick in global tax data sharing among different jurisdictions, a trend that is already beginning to take shape. In March 2024, agreements between the governments of Australia and Indonesia were reached to share tax information, particularly regarding cryptocurrencies. Prior to that, in November 2023, 47 countries, including the United Kingdom, Brazil, Germany, and Japan, committed to the Crypto-Asset Reporting Framework (CARF), with plans to activate information-sharing agreements by 2027.
Recent: Indian crypto holders face a 70% tax penalty on undisclosed gains
It is also worth noting that decentralized finance and non-fungible tokens are not escaping the radar of tax authorities. They are well aware of the gains made on decentralized exchanges. Although the IRS has formulated guidelines to collect data from non-custodial brokers, full implementation is postponed until 2027. Even though tracking these activities may be more complex and some investors might think their assets are untraceable until transferred to centralized exchanges, tax officials are increasingly catching on. This isn’t just a scenario where the crypto industry knows best; tax authorities are actively recruiting experts from the cryptocurrency sector to better understand how individuals might attempt to circumvent regulations.
Perspective by: Robin Singh, CEO of Koinly.
This article is intended for general informational purposes only and should not be construed as legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect those of Cointelegraph.
