Taxpayers get a surprise as the IRS pushes for reporting on crypto assets

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The 2022 tax sea­son is com­ing to an end with­out many chal­lenges. For the first time in three years, the Inter­nal Rev­enue Ser­vice (IRS) will be able to meet the sched­uled dead­line, April 18. The agency man­aged to process mil­lions of indi­vid­ual returns despite the lin­ger­ing com­pli­ca­tions from the COVID-19 pandemic.

Pre­vi­ous­ly, the IRS offi­cials warned tax­pay­ers to brace for a chal­leng­ing and frus­trat­ing expe­ri­ence rife with delays and cus­tomer-ser­vice shortages.

Com­ment­ing on what has been most­ly a seam­less tax sea­son, Mark Jaeger, the VP of Tax Oper­a­tions at tax-prep soft­ware com­pa­ny Tax­Act, said,

“For most tax­pay­ers who have fair­ly sim­ple tax­es, and they e‑file and they choose direct deposit, that process — for the most part — has been very smooth.”

How­ev­er, fil­ing the returns of day traders lever­ag­ing plat­forms like Robin­hood proved a bit chal­leng­ing. Nicole Rosen, a Wash­ing­ton-based tax pre­par­er, point­ed out that she wit­nessed a sharp uptick in the num­ber of clients using ser­vices like Robin­hood to buy and sell stock.

Accord­ing to her, trad­ing stocks requires addi­tion­al forms that com­pli­cate the returns fil­ing process. Rosen spec­i­fied that the time need­ed to com­plete fil­ing such returns is about four hours, while nor­mal fil­ings take approx­i­mate­ly two hours. 

IRS continues pushing for crypto taxation

While the fil­ing process went smooth­ly,  the IRS caught many tax­pay­ers by sur­prise by requir­ing them to report cryp­to acqui­si­tions and sales. Accord­ing to Mike Green­wald, a part­ner at Fried­man LLP, this require­ment was espe­cial­ly sur­pris­ing to new cryp­to owners.

He added,

“It requires a con­ver­sa­tion that clients weren’t expect­ing to have. They don’t think about dig­i­tal cur­ren­cies the same way the IRS does.”

This news comes as the IRS con­tin­ues try­ing to find the best approach to tax the cryp­to sec­tor. For instance, the agency is adamant about tax­ing Proof-of-Stake (PoS) min­ing rewards as income.

How­ev­er, Joshua Jar­rett took the IRS to court in 2019 over the mat­ter, argu­ing that the rewards should be con­sid­ered new­ly cre­at­ed prop­er­ty and should not be taxed until he sells them. Jarett also demand­ed a refund, which the IRS ini­tial­ly denied until it appeared to be los­ing the case. 

After the agency agreed to issue the refund, Jarett declined the offer, say­ing accept­ing the refund would not exempt him from fur­ther tax­a­tion in the future. By refus­ing the refund, he left the case open, hop­ing that the court would com­pel the IRS to offer clear guid­ance on the matter.

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