The IRS may be missing out on $50 billion in unpaid crypto taxes each year, and a crackdown is in the works

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'Just because you feel safe and in the clear a few months after filing your tax return does not mean that you are. This can be remembered for many, many years.'

The Internal Revenue Service may be losing more than $50 billion each year as a result of crypto dealers failing to pay their taxes. And the agency is paying attention.

According to a recent Barclays report released last week, managing director Joseph Abate estimates that the tax gap from crypto trading — the difference between how much tax revenue the IRS collects and how much it is owed — might be as high as $50 billion per year.

Barclays calculated the current crypto tax gap by extrapolating data from the IRS in 2017 and estimating that it accounts for 10% of the overall national tax gap.

According to Barclays, the margin is likely substantially larger. This is due to the fact that "most of the DeFi activity occurring today did not exist four years ago." DeFi, which stands for decentralized finance, attempts to use bitcoin to replicate existing financial structures such as banks and exchanges. The Ethereum blockchain is used by the majority of them.

"While all transactions may be public on the blockchains," Abate argues, "if all counterparties are anonymous, it is difficult for the IRS to determine who owes taxes." "Without any supporting IRS data, we believe the $50 billion estimate for the crypto tax shortfall is likely too low."

This is not to argue that cryptocurrency traders should aim to avoid paying taxes on their profits. Instead, companies should be more diligent in reporting than ever before, since the IRS has strengthened its crackdown on would-be crypto tax evaders in recent years.

"The IRS has been leaning very hard, investing in both staff and process and form revisions," says Austin Woodward, CPA and CEO of bitcoin accounting platform TaxBit.

For the past two years, the first item on taxpayers' 1040 forms after filling out their contact information has been a question asking if "at any time during 2021, did [they] receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency," which taxpayers must answer under penalty of perjury.

"Now, there's intent behind this intentional neglect if you answer 'no' and don't record your crypto gains," Woodward tells CNBC Make It. Failure to report gains could lead to a long IRS audit and potential fines.

The best course of action for crypto traders is to be open and honest about their crypto purchases and transactions on their tax returns. Because the IRS conducts audits with a two-year lag, Woodward believes that traders who have previously failed to disclose gains may still be discovered.

He advises keeping precise records of your transactions in order to answer any queries the agency may have. If you need to make changes to a previous tax return, you can do it electronically with the IRS using this link.

"I believe the ideal strategy for any cryptocurrency user is to operate as if it is not at all anonymous," he argues. "Just because you think you're safe and clear a few months after filing your tax return, that's not the case." This item has the potential to last for many, many years."

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