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IRS launches Operation Hidden Treasure and the implications for CPAs

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

It’s been well reported in cryptocurrency circles that Damon Rowe, Executive Director at the IRS Office of Fraud Enforcement, unveiled “Operation Hidden Treasure” at a recent Federal Bar Association virtual tax conference. The long-time veteran of the IRS Criminal Investigation division explained that the office has put together a dedicated team of IRS criminal investigation professionals to work on this operation. Their focus is on taxpayers who omit cryptocurrency income from their tax returns. But this is just the most recent step in the increasing IRS focus on cryptocurrency tax, here’s a brief timeline on past activities:

  • 2021 – Launch Operation Hidden Treasure
  • 2020 – Move Virtual Currency Question to 1040, page 1 and IRS sends out second round of notices to crypto taxpayers
  • 2019 – IRS sends out the first round of notices to crypto taxpayers and adds a Virtual Currency Question to 1040, Schedule 1
  • 2018 – IRS Launches Compliance Campaign focused on cryptocurrency tax reporting
  • 2017 – Courts rule in favor of the IRS and Coinbase provides records
  • 2016 – IRS issues “John Doe” summons to Coinbase for 500,000 customer records
  • 2015 – IRS reportedly using blockchain analysis tools in investigations
  • 2014 – IRS Notice 2014-21 states virtual currencies are property for federal tax purposes

Taxpayers need to consider crypto when filiing

Underreporting of cryptocurrency income is not a new phenomenon. To this day many taxpayers don’t understand crypto tax consequences or believe the IRS can find them. To this last point Carolyn Schenck, national fraud counsel for the IRS reiterated “these transactions are not anonymous, we see you.”

Cryptocurrency’s slow adoption is reflected in adoption by firms and CPAs. Some professionals have even said that they hope to retire before it becomes mainstream.

Unfortunately for them, that time is past.

Conservative estimates expect 18-21 million taxpayers will need to consider crypto when filing their 2020 tax returns. Taxpayers can no longer plead ignorance on their cryptocurrency tax obligations with the new page 1 question. As they look to their professionals for guidance and assistance, professionals need to be prepared.

Understanding compliance obligations

For CPAs, the first step is understanding the compliance obligations. Capital gains and losses are the primary compliance impact for crypto clients and the IRS has detailed out which transactions are taxable. While many transactions, like selling cryptocurrency for US dollars or other traditional currencies are widely understood, there are several nuances unique to crypto.

  • Any transaction where cryptocurrency is exchanged for something of value is a taxable transaction. This can be purchasing a cup of coffee, to exchanging one crypto currency for another.
  • Fees incurred in certain crypto transactions can create a taxable transaction if paid with crypto.
  • It is also possible to earn income from crypto. Any payments in crypto for goods or services are treated as income to the recipient. This also includes income from mining, staking and other Decentralized Finance (DiFi) activities.

Ledgible by Verady

Ledgible by Verady provides AICPA SOC assured tax reporting and portfolio tracking for crypto assets. The Ledgible platform is the proven cryptocurrency asset solution for professionals, in use at leading accounting firms and major crypto companies around the world. Ledgible Tax Pro is used by hundreds of firms to make tax reporting easy for their professionals and clients. Through our collaboration, Ledgible integrates seamlessly with both GoSystem Tax RS and UltraTax CS and is the exclusive data provider for Thomson Reuters.

Fortunately, the technology driving crypto can also make the professionals’ job easier. Tools like Ledgible Tax Pro make it easy for your clients to connect their exchange accounts and wallets for the system to identify taxable transactions, calculate the correct tax gain/loss, and import the results directly into professional tax packages.

The second step is preparing for the advisory opportunities with crypto. Operation Hidden Treasure will only increase the volume of 6173, 3174, 6174-A letters and CP2000 notices going out to taxpayers. Being prepared to advise clients and representing them in crypto audits will be a high-demand skill set. The IRS has trained and armed its staff with blockchain analysis and analytics tools to support audits. It’s paramount CPAs gain access to similar tools to level the playing field.

This is where Ledgible’s roots in Financial Statement audits of blockchain companies is invaluable. Ledgible Tax Pro reports the full history of all transactions from a client’s exchange accounts and wallets. All transactions are identified and can be categorized as needed. Supporting details track the movement of crypto currencies between exchanges and wallets to prove which transactions are taxable vs tax free transfers.

While audit defense is important, the tax planning opportunities with crypto will provide greater value to your clients. Incorporating crypto into overall tax planning conversations ensures all options are available to achieve client objectives. Harvesting crypto gain/losses in conjunction with traditional investments is a great way to minimize the overall tax impact.


Given the many ways cryptocurrency will impact clients, CPAs have a tremendous opportunity to launch their own version of “Operation Hidden Treasure” to identify, attract and provide needed services to the millions of crypto taxpayers.

Learn more about crypto tax consequences at our upcoming webinar: Tax compliance for Bitcoin and virtual currencies

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