Hey, Crypto Retail Investors: The IRS Is Eyeing Your Wallet

Node40 cofounder Sean Ryan speaks about the changing landscape around cryptocurrency taxes.

Taxes in the cryptocurrency investment space have been a dicey business since day one. A lack of clarity from the IRS combined with a lack of accountability tools for cryptocurrency businesses and retail investors has created an atmosphere of confusion; for years, the vast majority of retail investors haven’t bothered filing any taxes on their cryptocurrency-related activity.

But things are shifting in the crypto tax space. Recently, Finance Magnates spoke to Sean Ryan, co-founder of digital currency tax agency Node40. Ryan told us about how his company was formed, why retail investors haven’t been paying their taxes, and how that’s about to change.

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”We have to do this.”

Node40 didn’t start off as a tax agency. “We started off doing infrastructure hosting for blockchains,” he said. In exchange for hosting blockchains, the company would accept payments in digital currency. This eventually led to the company’s evolution into what it is today: “at the end of the year we had a lot of invoices that were paid to us in digital currency. We [would go] to our account and say, okay, what do we owe in taxes?”

“This was back in 2015, when a lot of this was very new, although the IRS had issued some guidance in 2014 saying that [digital currency] was property, which was essentially all you needed to know until you really get into the nuances of trying to pay your taxes.”

In the end, Ryan created a number of shell scripts that recorded and calculated the data that the company needed in order to file its taxes. Through the process of figuring out Node40’s taxes that year, though Ryan and the company’s other co-founder, Perry Woodin, realized that they were not alone in their struggles to file taxes on their digital currency.

“Perry and I turned to each other and said, ‘we have to do this.’” Thus, Node40 was reborn as a tax company.

“If you’re in violation of reporting requirements on a business, that could put you out of business.

At first, the company primarily served retail investors. However, “that evolved quite quickly into businesses needing to understand their own liability.” Ryan explained that this is because “people think that they can get away with [not filing taxes] more than a business would.” This may be exacerbated by the fact that the IRS has not provided retail investors with much clarity on how taxes on their cryptocurrency should be paid.

“If you’re in violation of reporting requirements on a business, that could put you out of business,” he said. “We found that more businesses were looking to pay taxes, were looking to understand [their taxes], and also–more importantly–not looking to overpay their taxes.”

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Node40 has also signed on a growing number of small- and medium-sized cryptocurrency exchanges. “They have the same problem,” he said.

“The percentage of [retail investors] reporting is very low,” but not for long

As for retail investors in the digital currency space, however, filing on crypto activity is abysmal–but perhaps not for much longer.

“The percentage of [retail investors] reporting is very low,” Ryan said. “That’s changing, though. We can see this is changing because [government] agencies are cracking down on this–they’re making announcements saying that enforcement efforts are well underway.”

Ryan referenced the famous court battle between cryptocurrency wallet and exchange app Coinbase and the IRS that was resolved last year. The IRS demanded that Coinbase hand over data on 500,000 of its customers; in the end, Coinbase was ordered to hand over account information on just 13,000 customers.

Ryan also cited the fact that the IRS has set up working groups to “identify potential tax evaders.” One of these is the J5, an international effort that was organized to investigate cryptocurrency-related crimes and money laundering. Other countries involved in the group include Australia, Canada, the Netherlands, and the United Kingdom.

“We do see the IRS actively going after this,” Ryan said.

The IRS’ Crackdown May Be a Sign of Pressure From Other Government Bodies

He also explained that part of the reason for the IRS’ crackdown may be pressure from other government bodies. “The IRS–they’ve been beaten up by other agencies. I think the Coinbase summons was actually triggered by the treasury,” he said.

Ryan explained further that the IRS is “on the hook” for enforcement of the Bank Secrecy Act (BSA) in the private sector, which could account for some of the pressure from the treasury and other agencies.

“The treasury inspector general [called out] the IRS–saying ‘guys, you issued this notice back in 2014, but you haven’t done [anything about it]. There’s no enforcement effort…we’re identifying exchanges and individuals that we think are money services businesses. Now go enforce them.’ The IRS’ response was the ‘John Doe summons’ [on Coinbase].”

“People should not have any illusions that this is just a ‘one and done.’”

“I do see an active enforcement effort coming,” Ryan explained. “Actually, I think it’s happening now–a lot of this stuff is not known to us, but we see it trickle out from time to time in the form of subpoenas or issuance, like the Coinbase [example.]”

Ryan went onto say that this enforcement effort is closing in on retail investors specifically. “I think the low-hanging fruit here was Coinbase, because they’re a big exchange and they’re nicely regulated,” he explained. It was a nice opportunity for the IRS to “flex their muscles and say, ‘hey look, we’re doing something. We’re taking this seriously.’”

“But I don’t think it’s going to stop there,” Ryan said. “People should not have any illusions that this is just a ‘one and done.’”

Later in the interview, Sean Ryan went deeper into the specifics of exactly when retail investors need to file taxes. To hear the rest of the talk, click the Soundcloud or Youtube links.

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