As party goers rang in 2017 this past holiday weekend, owners of Bitcoins had additional reason to celebrate as the value of the digital currency soared past $1,000 USD on Monday. The surge in Bitcoin price, up from just $200 USD in January 2015, may provide additional fodder for the IRS, who has its crosshairs set on Bitcoin users who do not properly report their income related to the buying, selling, and/or exchanging of the digital currency.
In 2017, look for the feds to double down on efforts to cash in on unscrupulous virtual currency users through increased federal tax investigations and prosecutions. The joint effort by the IRS and DOJ to pursue Bitcoin users for tax evasion may resemble the federal government’s activities in recent years to go after offshore banking tax evaders, which has so far resulted in the feds collecting more than $10 billion in taxes and fines. To that end, in November of 2016, the IRS issued a John Doe summons to CoinBase, an online forum for buying and selling Bitcoin and other digital currencies. The IRS is seeking information about Bitcoin and other digital currency account users and transactions from 2013 to 2015. The courts have yet to reach an ultimate decision regarding what (if any) records CoinBase will have to turn over to the IRS, but most believe the feds will ultimately prevail in the dispute, likely resulting in the nation’s chief income tax enforcement agency gaining access to information about millions of Bitcoin users here in the U.S. Moreover, it is highly unlikely that the IRS will stop with the summons to CoinBase. As UBS was the first domino to fall in a series of international banks turning over the names of U.S.-based taxpayers with offshore accounts, expect other online digital currency exchanges like CoinBase to receive similar requests from the IRS in coming years. The digital currency exchangers’ ultimate compliance with these requests will no doubt provide the IRS with a treasure trove of information to use in investigating Bitcoin and other digital currency users for tax evasion and other financial crimes.
As the IRS acquires this information, it will be relatively easy for its agents to cross reference the user’s digital currency transaction history with their U.S. federal tax returns (if filed) to determine whether the user appropriately reported any income related to their digital currency dealings. The failure to properly account for and report taxable income related to these activities could have devastating civil and criminal consequences for the individuals involved.
If you deal in Bitcoins or other digital currencies and have not reported the income and/or gains related to such transactions to the IRS, you should contact an attorney experienced in civil and criminal tax matters to discuss your situation.
The feds have tossed the coin in the air and it’s only a matter of time before it lands. For additional information, please contact Joe Orlet.