X
X

Find Your Specialist

X

Contact Us

    Go Back

    No Hiding Behind Virtual Currency, IRS Insists — and Court Agrees

    Bitcoins and other virtual currency are on the national radar with articles and commentary offered every day on their increasing use and on the government’s attempts to regulate the cryptocurrency market. No agency is more interested in the rise of the bitcoin than the IRS because of the potential tax avoidance from using an anonymous currency that is difficult to track and not deposited in any bank.

    The IRS’s plan of attack is to compel Coinbase, the U.S.’s largest bitcoin exchange headquartered in California, to identify users who conducted annual transactions of more than $20,000 on its platform between 2013 and 2015. A federal district court in California now has issued an order enforcing the IRS summons, telling Coinbase to turn over information on its users, but not all of the information the IRS wanted. The IRS initially requested complete user profiles, documents regarding third-party access, transaction logs, records of payments processed, correspondence between Coinbase and Coinbase users, account or invoice statements and records of payments. The Court only ordered the company to give the IRS taxpayer ID numbers, names, dates of birth, addresses, transaction logs, and account statements. The transaction logs identify the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction.

    IRS Points to Low Reporting Numbers

    It is estimated that the IRS information request will apply to more than 10,000 Coinbase account holders. The IRS told the Court that it is seeking the information because of a large discrepancy in known user numbers at Coinbase versus the number of taxpayers who filed Form 8949 with the IRS reporting gain on their virtual currency transactions. Form 8949 is used to report sales and other dispositions of capital assets.

    In approving the IRS request for information, the Court states, “Moreover, Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains. The IRS has a legitimate interest in investigating these taxpayers.”

    Forms 1099-K

    Coinbase is trying to head off conflicts with the IRS, noting in public announcements that it sent Form 1099-Ks to its customers in 2017. That form is used to report payment card and third party network transactions involving 200 receipt transactions and $20,000 in cash received.

    As the IRS and the courts stake out new ground on treatment of virtual currencies, one thing is becoming clear. The privacy and anonymity of these currencies is short-lived. This case indicates that the IRS is committed to finding investors who do not have pay federal taxes on their virtual currency profits.

    As we went to press, the price of a Bitcoin was $10,335.00. Bitcoin’s Twitter account can be found here.

    How are bitcoins taxed?

    The IRS issued Notice 2014-21 in 2014 explaining that virtual currency is property for tax purposes and will be taxed as capital gains or losses when bought and sold.

    Related Articles

    • 01.25.2023

      A New Year Means New Privacy Laws

      Ever since the General Data Protection Regulation (GDPR) came into effect in May 2018, US state privacy laws have been passed in Virginia, Colorado, Connecticut, Utah and, most pressing of them all, California. The California Privacy Rights Act (CPRA) went…

      Continue Reading
    • 01.19.2023

      The New Rules Under Section 174

      Internal Revenue Code Section 174 has long been used by taxpayers to deduct certain expenses related to research and experimentation (R&E) in the current year.  The code section was originally enacted in 1954 to eliminate uncertainty in the tax accounting…

      Continue Reading
    • 12.20.2022

      IRS Customer Service May Improve in 2023

      With 4,000 new customer service representatives and plans to hire 700 new Taxpayer Assistance Center (TAC) employees, taxpayers soon may get relief from endless hold times, no in-person help and unresolved problems.

      Continue Reading
    • 12.12.2022

      Reduce Taxable Income with IRA Distributions Transfers

      IRA owners who are age 70½ or over can transfer up to $100,000 per year to charity to reduce their taxable income. These transfers, known as qualified charitable distributions or QCDs, offer end-of-the year tax savings and can count toward required minimum distributions (RMDs) that taxpayers who are age 72 must make each year. Think of it as a tax-free charitable rollover of IRA funds.

      Continue Reading
    • 12.02.2022

      UK R&D Tax Reliefs – Where Are We Now?

      In the November 2022 Autumn Statement, the Chancellor announced significant changes to the current Research and Development (R&D) tax reliefs. The key announcements were a change to the applicable rate of the Research and Development Expenditure Credit (RDEC) and a…

      Continue Reading
    • 12.01.2022

      1099s Required for 2022 Tax Year

      Taxpayers earning income from selling goods or providing services may receive a Form 1099-K, Payment Card and Third-Party Network Transactions, for the first time in early 2023, when the 2022 forms are due. The requirement to file Forms 1099 have…

      Continue Reading
    • 11.28.2022

      IRS Uncovers $3.1 Billion in COVID Fraud

      The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than…

      Continue Reading
    • 10.25.2022

      IRS Inflation Reduction Act Increases Funds

      The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles…

      Continue Reading

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled