IRS Levies on Cryptocurrency
In 2022, the IRS seized $7 billion in cryptocurrency. This is double the amount seized in the previous year, and in early 2023, the agency is working on hundreds of additional cases.
The Chief of the IRS's Criminal Investigation Division, Jim Lee, reported that the majority of cases involve taxpayers who didn't report crypto transactions property on their tax returns. This happens when people exchange crypto for fiat currency or use it for purchases, but they don't report the gains (or losses) properly on their tax returns.
In the past, most crypto seizures were related to money laundering, but this has been shifting over the last three years. If you have delinquent taxes or unreported crypto transactions, you need to be aware of the risk of a crypto levy. Here's what you need to know.
Can the IRS Seize Cryptocurrency for Unpaid Taxes?
Yes, the IRS has the right to seize cryptocurrencies such as Bitcoin, Ethereum, and Tether to cover your unpaid tax bills. A 2014 IRS notice declared that virtual currencies are considered property rather than currency. This laid the groundwork for the agency to start levying crypto for delinquent tax liabilities.
How Does a Crypto Seizure Work?
Before seizing any assets, the IRS must assess a tax against you and notify you of the tax due. If you ignore these notices, the agency can send you a Final Notice of Intent to Levy. The IRS must send this notice at least 30 days before the levy takes place.
It's critical to take action within this 30-day period if you want to stop the levy. If you don't respond, the IRS can levy your cryptocurrency as well as your bank accounts and other real or personal property.
However, the IRS does not need to follow these rules in cases where the collection is in jeopardy. This especially applies in cases that involve financial crimes such as money laundering or fraud.
How Does the IRS Know that You Have Crypto?
There are a few different ways the IRS can find out whether or not a delinquent taxpayer has cryptocurrency. In 2021, the Infrastructure Investment and Jobs Act required crypto brokers to track and report transactions to the IRS. This gave the IRS greater insight into who has crypto.
If a crypto exchange issued you a 1099-B or 1099-K, the IRS has these details. Additionally, if you filed a tax return and marked that you have crypto, the agency also knows that you have that. Finally, the IRS can subpoena crypto exchanges to disclose information on user accounts.
People often think of crypto as very secretive, but this is not the case when the IRS is involved. In 2022, the IRS created the Office of Cyber and Forensic Services to investigate digital crimes. This unit focuses on digital assets, cybercrimes, and digital forensics, and it can trace nearly any crypto transaction.
IRS Seizes Billions in Cryptocurrency
Crypto is one of the most commonly seized assets. In fact, in 2021, crypto levies accounted for over 90% of all IRS seizures. This includes levies related to crimes, but it also includes seizures to cover unpaid taxes.
The IRS has extensive rights to seize taxpayers' assets for unpaid taxes. As long as the agency follows the correct protocol, it can seize wages, bank accounts, and personal and real property, including your primary residence. If you have unpaid taxes or are worried about tax crimes, reach out for help from a tax professional as soon as possible.
Applying Levied Assets to Your Tax Bill
If the IRS seizes your crypto because you have unpaid taxes, the agency will sell the crypto once it has it. Then, it will apply the proceeds of the sale to your tax bill. However, the agency will also add collection costs to your bill.
The amount applied to your bill will usually not be the amount you bought the crypto for. Instead, it will be the amount that the IRS gets by selling the crypto minus the costs of seizing and selling it. For instance, if you purchased $10,000 of crypto and the IRS sells it for $25,000, the agency will apply $25,000 minus collection costs to your tax bill.
How to Avoid a Crypto Seizure
The exact steps you should take to avoid a crypto levy vary based on your situation. In general, you can avoid a levy by staying compliant with tax regulations, but here are the main options.
Report crypto transactions on your tax return.
To protect yourself against a crypto seizure, ensure you report crypto transactions properly on your tax return. Nearly anytime you use crypto, it appreciates, and you use it to buy goods from a website. In this situation, you have a $500 capital gain that you must report to the IRS.
Use the Voluntary Disclosure Program for unreported transactions.
If you have unreported crypto transactions from previous years, see if you can take advantage of the IRS's Voluntary Disclosure Program. Typically, you can only qualify if the IRS hasn't audited your return or contacted you about the issue. If you qualify, you can report your crypto transactions without incurring penalties. A tax professional can help you navigate this program.
Respond to levy notices.
If you have received a notice that the IRS plans to levy your crypto accounts for unpaid taxes, make sure that you take action before the deadline. You may be able to stop the levy by setting up a payment plan, applying for an offer in compromise, or obtaining currently not collectible status. The IRS has many options to work with delinquent taxpayers.
Get Help Before the IRS Levies Your Cryptocurrency
If you're worried about a potential cryptocurrency levy, contact a tax professional. They will talk with you about your situation and help you figure out the best path forward. They can also help if you have didn't report your crypto on your tax return and aren't sure what to do. The right steps vary depending on what's happening, which is why it's critical to work with a tax pro who is experienced with cryptocurrency issues.
Using TaxCure, you can search for local tax professionals or tax pros in other areas who specialize in crypto. Tax laws governing crypto transactions are relatively new and still in flux. At the time of writing, there is a proposal to change the tax treatment of crypto. If adopted into law, the change will expose crypto transactions to the wash sale rules, generating a potential $24 billion in tax revenue. This is why it's critical to work with someone who has experience.
To get help now, contact a tax professional now. Most CPAs, tax attorneys, and enrolled agents start with a free consultation. Then, you can decide if they are the right person to help you.