TaxBit partnership aims to fill the IRS knowledge gap on crypto

Quick Take

  • A new partnership between the IRS and crypto tax firm TaxBit marks another step to filling the regulator’s knowledge gap on crypto.
  • It comes just after the firm raised $100 million from PayPal and other big players — and also after the IRS served information requests to some crypto exchanges.
  • TaxBit will mostly handle high earning and high volume trader audits, using its crypto accounting tools to help the regulator comb through its crypto data for one year in the $1 million contract.

The Internal Revenue Service (IRS) has been asking questions about cryptocurrency — and now it's formally employing the services of a crypto tax firm that's gotten a nod from PayPal, Coinbase and other big players. 

One year ago, the tax regulator sent a statement of work to a number of crypto tax firms, seeking assistance from cryptocurrency-related tax firms. Now, the contract has been awarded to DPI , for $1.001 million, according to the IRS. The agreement is set to last one year, but TaxBit's Director of Government Relations, Seth Wilks, says he expects the relationship to extend further. 

"I definitely foresee that this is going to be a longer-term relationship," he said. "We've served the IRS in many capacities to date, helping when they have technical questions about types of transactions, whether it's DeFi or some of the new things you find only in the crypto space."

News of the contract followed the completion of TaxBit's $100 million fundraise in a round backed by PayPal. In short, TaxBit is looking to be a Big Four grade firm for the crypto space.

Until now, TaxBit has served in something of a consultant capacity, as many firms in conversation with regulators do. But this contract formalizes that relationship. The IRS doesn't have any tools at the moment to work crypto data, so TaxBit will aim to fill that gap.

"This contract is just another step forward showing that the IRS is really taking proactive measures to make sure that they are filling that knowledge gap and that they have the ability to know when they come across taxpayers with crypto that they can make good, informed analysis of that data," said Wilks. 

And the IRS has been seeking more data. Examples include the launch Operation Hidden Treasure, a commitment to specifically find under-reported crypto, and the serving of John Doe requests to multiple crypto exchanges in order to obtain private data about potential tax avoidance. The agency has also moved its crypto question to the top of the 1040 form, where all taxpayers will see it, and it's told Congress that a formalized crypto taxonomy for tax would help close the gap of those failing to pay up. 

But for now, TaxBit's relationship with the IRS is more educational and resource-based. It's not formally part of Operation Hidden Treasure and it's unlikely it will touch any of the information from the John Doe requests, according to Wilks. TaxBit's tools will mostly be used to audit high-volume traders and high-earning individuals. The IRS has the tools to audit a small-time crypto trader.

"If you've got a taxpayer with a few hundred transactions, that probably is a little bit more in the wheelhouse of one of their field agents, but when you've got hundreds of thousands across dozens of exchanges, that's way outside of their internal knowledge, and so we're hoping to fill that technical gap," said Wilks.

Indeed, there remains a reporting problem across exchanges.

Since there's no formalized way to report crypto income, the burden falls on the taxpayer to effectively over-report. Exchanges are migrating towards using Form 1099-B to report data, but there's no mandate from a regulator, and without a formal standard, confusion has ensued.

While the TaxBit partnership doesn't solve this problem, it provides the IRS an extra set of tools during audits to separate miscommunications from malfeasance. 

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