Introduction
The IRS has recently updated its Voluntary Disclosure Program (VDP) to provide more clarity on unreported cryptocurrency holdings. These changes offer crypto investors a pathway to correct past tax noncompliance while mitigating the risk of criminal prosecution.
In addition to cryptocurrency, the IRS has also introduced new guidance for estate, gift, and employment taxes under the VDP. Understanding these updates is essential for taxpayers seeking to resolve tax liabilities while minimizing penalties.
Should You Use the IRS Voluntary Disclosure Program for Crypto?
The IRS Voluntary Disclosure Program is designed for taxpayers who willfully failed to report income, assets, or foreign holdings.
Who Can Apply?
The VDP is available to taxpayers who:
-
Have not been contacted by the IRS for an audit or investigation.
-
Are not the subject of a John Doe summons.
-
Want to voluntarily correct tax noncompliance before facing IRS enforcement.
While the VDP does not guarantee immunity from criminal charges, successfully completing the process significantly reduces the risk of prosecution. Given the IRS’s increasing focus on crypto tax enforcement, taxpayers concerned about undisclosed cryptocurrency should carefully consider this option.
What Cryptocurrency Information Must Be Disclosed?
The IRS now requires detailed reporting of cryptocurrency transactions under the VDP, including:
-
All non-compliant virtual currency holdings during the six-year disclosure period.
-
Storage details, including where the crypto is held.
-
Use of crypto mixers or tumblers, along with the reason for using them.
Penalties for Unreported Cryptocurrency Under the VDP
While the VDP offers protection from criminal prosecution, it does not eliminate financial penalties. Taxpayers who voluntarily disclose crypto noncompliance must:
-
Pay all taxes and interest on unreported crypto income for the past six years.
-
Pay a civil fraud penalty of 75% on the highest tax deficiency year.
In some cases, participating in the VDP may reduce overall penalties compared to simply filing delinquent or amended returns.
Additional IRS Updates to the Voluntary Disclosure Program
Previously, the VDP primarily focused on income tax issues. The latest revisions provide clarity on penalties related to estate, gift, and employment taxes:
-
Taxable entities & individuals: The 75% fraud penalty applies to both taxable entities (such as C-corporations or trusts) and related individuals.
-
Estate tax penalties: The penalty is reduced to 50% for voluntary disclosures involving estate tax issues.
-
Gift & generation-skipping tax penalties: The six-year disclosure period is removed, requiring taxpayers to file all outstanding Form 709 submissions.
-
Employment tax penalties: The 75% fraud penalty applies to the tax quarter with the highest liability. Taxpayers must also file Form W-2 to comply with reporting obligations.
These updates highlight the IRS’s ongoing commitment to enforcing tax compliance, particularly in the cryptocurrency space.
Conclusion
The expansion of the Voluntary Disclosure Program underscores the IRS’s heightened focus on crypto tax enforcement. For taxpayers who failed to report cryptocurrency holdings, participating in the VDP may offer a path to compliance while reducing penalties.
Block3 Finance provides expert assistance in navigating the VDP process, ensuring accurate disclosures, and minimizing financial penalties for taxpayers with unreported cryptocurrency income.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.