IRS revisions to questions on tax-filing forms about cryptocurrency and other digital assets could lead to many reporting errors by taxpayers this year, advisor Ric Edelman says.
Variations of the question will appear on tax forms for estates, trusts, partnerships and C and S corporations. Clients and advisors need to watch for the new questions—and read them carefully.
“The IRS question isn’t asking about income. The question is far more nuanced, and many taxpayers, financial advisors and tax preparers will answer incorrectly,” said Edelman, founder of the Digital Assets Council of Financial Professionals and founder of the advisor firm now names Edelman Financial Engines.
The new questions vary slightly depending on the IRS tax forum but they basically ask corporate, partnership or estate and trust taxpayers if they received or sold, exchanged or otherwise disposed of a digital asset or a financial interest in 2023.
“Last [season], only individual filers were asked a question about their digital currency activity,” said Phil Drudy, lead managing director for CBIZ MHM’s New York tax department. “Most are unaware [of new enforcement IRS efforts] and, given that there’s minimal guidance, there remains a certain level of uncertainty.”
The new questions appear just as the IRS is promising sharper scrutiny on all virtual assets and wealthy tax cheats.
“The original group of crypto enthusiasts deeply resent any intrusion by the government into what they regard as a decentralized, anonymous and autonomous activity,” Edelman said. “Many further believe that the anonymous activities of investing and trading in crypto allow them to avoid taxation.
“These people are wrong,” he said, adding that the creation of bitcoin had nothing to do with "trying to help people evade taxes.”
Edelman said about 20% of U.S. adults own bitcoin, and the IRS believes tens of millions of Americans are failing to report the gains from their cryptocurrency.
“The main problem is that the IRS, in its efforts to capture the information it is seeking, has written the question in a manner that complex, and will cause many taxpayers to answer incorrectly,” Edelman said.
The emergence and popularity of the spot bitcoin ETFs will exacerbate this problem, he said.
Changed forms can always cause confusion year to year and require careful reading, advisors say.
Mary Kay Foss, a CPA in Carlsbad, Calif., said the changes the IRS has made to its questions pertaining to digital assets can be confusing, raising the question of whether tax preperation software is up to date on the revisions.
“All paid preparers and many do-it-yourselfers rely on software for their filings," she said. "The software generally provides a diagnostic if a required question is left unanswered."