Cryptocurrency Reporting Highlighted in 2022 IRS “Dirty Dozen” List

Each year, the IRS outlines the most prevalent tax schemes and scams targeted at taxpayers. Many of the items on the list are niche and will not apply to everyone (click here and here for the full list). There are plenty of ways to legally avoid or defer tax, but if it seems too good to be true, then it most likely is.

This list also serves as a reminder that the IRS will never contact you by email, text or phone call, unless you have established previous contact with an IRS agent. Each year I receive inquiries from clients regarding certain texts and calls received from the “IRS”. If you are unsure of the validity of any form of communication, please contact the IRS directly or reach out to a tax professional.

The focal point this year (and confirmed in 2023) remains the reporting (or lack thereof) of cryptocurrency and any related income and asset requirements. This is something that applies to more people than ever in 2022. U.S. citizens are taxed on their worldwide income, which includes income earned in cryptocurrency and income earned as the result of owning cryptocurrency (such as capital gains and staking). If you are approached with a scheme to evade tax on cryptocurrency through offshore or cold storage, please consult a tax professional.

Along with income reporting, owners of cryptocurrency may be required to file FBARs or file Form 8938 with their tax return. This applies to those individuals who hold cryptocurrency on foreign exchanges, rather than domestic exchanges or in cold storage. There is currently no definitive guidance on cryptocurrency and FBARs, but since it is treated as property for tax purposes, crypto held on foreign exchanges should not be subject to FBAR reporting. However, if you hold fiat on these foreign exchanges at any point throughout the year, you would be subject to FBAR reporting on those amounts if the applicable thresholds are met.

Current foreign reporting guidance does not exempt cryptocurrency from Form 8938 requirements. This form still needs to be filed if you hold cryptocurrency on a foreign exchange and meet the necessary filing threshold. The penalties for failing to file an FBAR are quite steep, so it is something every cryptocurrency owner should consider.