Insights

IRS Launches Operation Hidden Treasure to Capture Taxable
Income Not Reported From Cryptocurrency Transactions

The Internal Revenue Service (IRS) is focusing on the millions of taxpayers who have failed to report taxable transactions that they engaged in through their use of virtual currencies or cryptocurrencies through a new initiative called Operation Hidden Treasure. Operation Hidden Treasure is a collaboration of IRS Criminal Investigation and its Fraud Enforcement Office.

In the seven years since the IRS first addressed the taxation of virtual currency in Notice 2014-21, the awareness level as well as the number of users and investors in the currency has mushroomed. The 2014 guidelines basically said that virtual currencies or cryptocurrencies are not currency at all, but property. As such, they generate income whenever they are sold or exchanged. Unlike stocks and bonds, there is no brokerage statement or 1099 for cryptocurrency, so it’s up to the taxpayer to calculate figure individual taxable transactions.

Conservatively 18 to 21 million taxpayers will need to consider cryptocurrency transactions in preparing their 2021 tax returns. The IRS increased its focus on cryptocurrency this year by putting this question on Page 1 of the Form 1040: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Operation Hidden Treasure includes a dedicated team of criminal investigators trained in virtual currency tracking. Coinbase, the biggest exchange, has over 53 million accounts. The IRS knows as a result of its subpoenas to exchanges like Coinbase that a lot of people are making a lot of money in virtual currency, but they’re not seeing anywhere near that number of returns mentioning those gains, which is why they created Operation Hidden Treasure.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.