The landscape of cryptocurrency has been constantly evolving with the increasing scrutiny by tax authorities, particularly the Internal Revenue Service (IRS) in the United States. As a result, crypto investors and traders are often curious about the reporting practices of various exchanges. The question, “which crypto exchanges do not report to IRS?” is a loaded one, with implications ranging from privacy concerns to tax obligations.
Understanding IRS Guidelines on Cryptocurrency
Before diving into the exchanges, it’s crucial to understand the IRS’s stance on cryptocurrencies. The IRS treats virtual currencies as property for federal tax purposes, meaning that transactions involving cryptocurrencies are subject to the same tax treatment as other forms of property. Therefore, gains or losses from the sale or exchange of cryptocurrency must be reported.
In 2019, the IRS began sending letters to cryptocurrency holders advising them of their tax obligations and stating that they may owe taxes on past transactions. This action was a clear indication of the IRS’s intent to enforce compliance.
Many companies have started pulling out of the US due to the IRS’ increased pressure. Bittrex closed it’s doors due to the “current U.S. regulatory and economic environment”. Binance stopped allowing US transactions because its banking partners cut the firm off in response to a crackdown by federal regulators, according to the NYTimes.
The Reporting Landscape of Crypto Exchanges
Know Your Customer (KYC) and Anti-Money Laundering (AML) Regulations
The majority of reputable crypto exchanges operate under strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. These rules require exchanges to collect personal information from their users, which can be shared with tax authorities if requested. Therefore, most of the well-known exchanges, especially those operating in the U.S. or serving U.S. customers, will report to the IRS to some extent.
IRS Form 1099-K and the Exchange’s Obligations
Many exchanges issue IRS Form 1099-K to users who meet certain criteria, such as transaction volume or number of transactions. This form reports the total value of transactions on the platform and is intended to remind taxpayers of their obligation to report income.
Cryptocurrency Exchanges and Privacy
The question then becomes: Are there exchanges that do not report to the IRS? While no reputable exchange would openly advertise non-compliance with IRS regulations, there are platforms, often decentralized and without a central authority, that do not have the same reporting infrastructure as their centralized counterparts.
Decentralized Exchanges (DEXs)
Decentralized exchanges (DEXs) facilitate peer-to-peer trading without the need for a centralized authority. These platforms do not hold customer funds and typically do not require users to reveal their identities. As a result, they do not directly report to the IRS. However, this does not exempt users from their tax obligations. Transactions on DEXs are still taxable events, and users are responsible for maintaining their own transaction records for tax purposes.
Foreign Exchanges
Some foreign exchanges may not have the same reporting obligations to the IRS as U.S.-based exchanges. However, the Foreign Account Tax Compliance Act (FATCA) has increased the reporting requirements for foreign financial institutions, including crypto exchanges, to the IRS. U.S. taxpayers holding foreign accounts must report them if they exceed certain thresholds.
Taxable Events
Even using a DEX or foreign exchange, using a VPN. If you are based in the US once the crypto returns to a US based wallet, if there was a capital gain or loss, it is a taxable event. If you do not hold your wallet in the US and maintain an LLC or assets in a crypto-haven country you will have a much easier time reconciling your tax liability. Those still are potentially eligible for tax under FATCA.
The Risks of Using Non-Reporting Exchanges
Tax Evasion and Legal Consequences
It’s important to emphasize that seeking out exchanges solely for the purpose of avoiding IRS reporting can be seen as intent to evade taxes and could result in legal consequences. The IRS has been expanding its capabilities to track transactions across blockchains and through various exchanges.
Security and Reliability Concerns
Exchanges that do not comply with KYC and AML regulations often carry higher risks of fraud and hacking. The security measures and reliability of such platforms may not match those of more regulated exchanges.
What do you do about Unreported Crypto Gains?
The Risks of Not Reporting
Detection Capabilities of the IRS
The IRS has been ramping up its capabilities to track and trace cryptocurrency transactions. Through various data matching and compliance programs, they can identify unreported income from crypto exchanges and wallets. The IRS uses sophisticated software and collaborates with other agencies, both domestic and international, to collect data on crypto transactions.
Penalties for Non-Compliance
If the IRS discovers unreported crypto gains, the repercussions can be severe. Taxpayers may face hefty penalties for underreporting income, and these penalties can accrue interest over time. In the most serious cases, if the IRS believes that the failure to report gains was fraudulent, individuals could face criminal charges, including tax evasion.
The Taxpayer’s Responsibility
As with any form of income, the onus is on the taxpayer to maintain accurate records of all cryptocurrency transactions. Even if the exchange or platform used does not report to the IRS, the taxpayer is still legally obligated to declare all taxable events.
Reporting Past Non-Compliance
For those who have previously failed to report crypto gains, the IRS has mechanisms in place that allow taxpayers to correct their returns. Voluntarily amending a tax return to report previously unreported gains is typically looked upon more favorably than waiting for the IRS to discover the omission.
The Consequences of Unreported Gains
Financial Consequences
The financial consequences of not reporting can include the aforementioned penalties and interest. There’s also the risk of an audit, which can be an invasive and lengthy process. Audits can lead to further discoveries of inaccuracies in tax reporting, leading to additional penalties.
Legal Consequences
While most cases of unreported gains result in financial penalties, significant cases of tax evasion can lead to criminal prosecution. This can result in fines and potentially imprisonment.
The Bottom Line: Compliance Is Key
While privacy is a legitimate concern for many users, compliance with tax regulations is a legal obligation. Investors should be wary of the risks associated with using exchanges that do not report to the IRS and remember that they are personally responsible for reporting all taxable transactions.
Best Practices for Crypto Tax Compliance
- Maintain detailed records of all cryptocurrency transactions, including dates, values, and the nature of each transaction.
- Use tax software or consult with a tax professional who is knowledgeable about cryptocurrency tax regulations.
- Consider the implications of using a DEX or foreign exchange, including the potential need to report under FATCA or other applicable laws.
- Talk with a crypto tax professional to discuss ways to differ or offset your tax obligations.
In conclusion, while certain exchanges might not actively report to the IRS, it is the responsibility of each individual to understand their tax obligations and act accordingly. Navigating the complex intersection of cryptocurrency and tax law requires due diligence and, often, professional advice. Remember, in the ever-watchful eye of the IRS, transparency is the best policy.
