Federal Prosecution

Do not think that just because digital exchanges are not broker-regulated by the IRS and digital exchanges are not obligated to issue a 1099 form reporting transactions, that your crypto currency transactions will always be a secret. The Federal government is cracking down on non-compliant traders and pursuing criminal prosecution when it feels its appropriate.

Voluntary Disclosure

Just over 800 taxpayers declared cryptocurrency-related capital gains or losses in 2013, 2014, or 2015, despite the fact that hundreds of thousands of individuals sell or purchase Bitcoin on Coinbase. Just earlier this year IRS was successful in getting a U.S. District Court Judge to order Coinbase under an IRS Summons to turn over 14,000 users. Those users will have some explaining to do to the IRS why they did not report their crypto transactions.

IRS Audits & Litigation

After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.

Tax Reporting

The IRS is expected to issue new IRS initiatives on taxpayer compliance and reporting obligations for crypto currency (e.g. Bitcoin, Coinbase) transactions. The IRS is expected to affirm its position on crypto currency as property rather than cash, and to step up monitoring to increase compliance, consider criminal investigations and prosecutions for failing to properly report crypto-currency transactions and to define proper reporting and tax treatment for “mining” and exchanging crypto currency.

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Crypto currency is digital currency using encryption techniques, rather than a central bank, to generate, exchange and transfer units of currency. Uniquely, no bank or government authority verifies the transfer of funds. Investors may use “mining operations,” purchase, receive payment, or transfer crypto units to and from another user.

Initial IRS guidance on crypto currency (IR 2014-36), treated all virtual currency as property, rather than currency, for U.S. tax purposes. Treasury left several questions unanswered, including whether crypto currency is business property eligible for tax-free exchange under §1031 and whether crypto currency is required to be reported on Foreign Bank Account Report (“FBARs”) or other foreign asset disclosure forms such as Forms 8938. The Tax Cuts and Job Act of 2017 impacts the analysis with its limitation on like-kind exchanges for non-real property transactions.

Is Bitcoin And Other Crypto-currency the 21st century answer to hiding assets in Swiss bank accounts?

The IRS thinks this is the case! That is why the IRS has stepped up its investigation efforts to uncover non-compliant taxpayers just like the IRS successfully did in its investigation of the Swiss banks leading Congress to enact the Foreign Account Tax Compliance Act (“FATCA”).  FATCA forces foreign banks to disclose information on U.S. account holders which the IRS receives and matches the information reported by U.S. taxpayers.  No longer can taxpayers avoid reporting income on their foreign bank accounts.  No longer can taxpayers avoid disclosing their foreign bank accounts.

But with Bitcoin and other crypto-currencies, there is no such third party reporting.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader – but that could be changing sooner than you think!

Key Issues

What are the limitations on loss recognition on crypto currency transactions and exchanges?
What are the income tax-reporting requirements for crypto currency exchanges and valuations?
What position does IRS appear to be taking on whether crypto currency exchanges qualify for 1031 treatment, and the impact of the newly enacted Tax Cut and Jobs Act of 2017?
What is the likely impact of the recent enforcement of the IRS “John Doe” summons to Coinbase?
What are the disclosure requirements for crypto-currency ownership?
How to use the IRS Voluntary Disclosure policy to get into compliance and the availability of “qualified amended returns” to avoid penalties?

Request A Case Evaluation Or Tax Resolution Development Plan

Get a Tax Resolution Development Plan from us first before you attempt to deal with the IRS. There are several options for you to meet or connect with Board Certified Tax Attorney Jeffrey B. Kahn. Jeff will review your situation and go over your options and best strategy to resolve your tax problems. This is more than a mere consultation. You will get the strategy or plan to move forward to resolve your tax problems! Jeff’s office can set up a date and time that is convenient for you. By the end of your Tax Resolution Development Plan Session, if you desire to hire us to implement the strategy or plan, Jeff would quote you our fees and apply in full the session fee paid for the Tax Resolution Development Plan Session.

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