IRS is probing the dark web to look for cryptocurrency, NFT tax evasion, says IRS commissioner

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Tax evasion using cryptocurrencies is “replicating” with nonfungible tokens and other new crypto-related products, according to the IRS Commissioner.

In testimony before the Senate Finance Committee Tuesday, IRS Commissioner Charles Rettig said the U.S. fails to collect as much as $1 trillion in taxes owed each year — in part due to the explosion in cryptocurrencies, which are difficult for the Internal Revenue Service to track and tax.

Rettig said that the crypto economy — now valued at over $2 trillion globally — continues to expand, and he specifically mentioned nonfungible tokens, or NFTs, as an example.

The crypto world, he said, “is replicating itself constantly. So now we have these nonfungible tokens, which are essentially collectibles in the crypto world. These are not visible items by design. The crypto world is not visible.”

“In the criminal context, the IRS criminal investigations, cybercrime unit has been spectacular operating in the dark web, engaging with cryptocurrency-related transactions,” Rettig said.

In response to a question from Sen. Rob Portman, R-Ohio, who said he is working on a bill to require more reporting and disclosure around crypto transactions, Rettig said that “absolutely, reporting with respect to cryptocurrencies would be important.”

Cryptocurrencies are taxed by the IRS as capital assets not currencies. So anytime a holder of bitcoin, for example, sells it or uses bitcoin for a purchase or exchange, they are required to pay capital gains on any appreciation in their bitcoin value since they purchased it. Tax experts say many crypto holders are either unaware of the requirement or avoiding the tax.

Platforms like Coinbase, which fought an IRS request for customer data in 2016, now report some customer information to the IRS. But tax experts say clearer government regulation is needed to require more taxpayer disclosure.

As a sign of how important crypto tax evasion has become to the IRS, the agency added a question to the top of the Form 1040 — the main income and tax reporting form — asking: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in virtual currency?”

NFTs have exploded in value and popularity in recent months, raising a whole new set of tax questions.

NFT sales topped $2 billion in the first quarter in the platforms tracked by NonFungible.com. Although NFTs are purchased with crypto — usually ether — many U.S. NFT buyers are not aware that they have to pay a capital gains tax when they use appreciated crypto to make a purchase.

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