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IRS Is Probing the Dark Web to Look for Cryptocurrency and NFT Tax Evasion, Says IRS Commissioner

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  • IRS Commissioner Charles Rettig said the U.S. fails to collect as much as $1 trillion in taxes owed each year, partially due to the explosion of cryptocurrencies.
  • The crypto world "is replicating itself constantly," Rettig said, who cited NFTs as an example.
  • Many NFT buyers are not aware that they have to pay a capital gains tax when they use appreciated crypto to make a purchase.

Tax evasion using cryptocurrencies is "replicating" with nonfungible tokens and other new crypto-related products, according to IRS Commissioner Charles Rettig.

In testimony before the Senate Finance Committee, Rettig said Tuesday 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 agency to track and tax.

Rettig said the crypto economy — now valued at over $2 trillion globally — continues to expand, specifically mentioning NFTs, as an example.

"So now we have these nonfungible tokens, which are essentially collectibles in the crypto world," Rettig said. "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 added.

Answering a question from Republican Sen. Rob Portman of Ohio — who said he is working on a bill to require more reporting and disclosure around crypto transactions — Rettig noted that "absolutely, reporting with respect to cryptocurrencies would be important."

Cryptocurrencies are taxed by the IRS as capital assets, not currencies. Thus, holders of the cryptocurrency are required to pay capital gains taxes if they sell their crypto for a profit or use it for a purchase. Tax experts say many crypto holders are either unaware of the requirement or avoiding the tax.

Platforms such as 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 also 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 they have to pay a capital gains tax when they use appreciated crypto to make a purchase.

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