The IRS battle with Bitcoin heats up after an exchange between a bitcoin user and the agency in court documents recently.  The IRS used a “John Doe” summons against Coinbase, Inc., a bitcoin exchange in order to identify specific US taxpayers with accounts at Coinbase.  This is the same strategy the IRS used successfully against Swiss banks in the past.  The agency seeks specific information including the presence of accounts and transactional information.  If a member of Coinbase, Inc. has an account that generated income, the IRS wishes to be able to compare that information with the taxpayer’s returns.  If the digital currency exchange income is not included on the taxpayer’s return, they can expect a full IRS audit.

A specific individual account holder challenged the IRS’ actions “were not properly calibrated and threatened their privacy.”  The IRS quickly dismissed this notion noting the respondent provided his name in Court documents and therefore had no standing with regards to privacy, as he, himself had disclosed his identity.  The IRS is likely to win this battle as it has in the past.  US Courts give the IRS a wide berth when it comes to tax collection and the pursuit of information regarding those who are attempting to evade income taxes.

The failure to report income from Bitcoin and other digital currencies is a substantial issue between a taxpayer and the IRS.  If the IRS is successful in their attempt to gain account and transactional information from Coinbase, Inc. the agency will easily be able to connect the dots between that information and taxpayers who have failed to accurately report income.  The taxpayers then face substantial civil penalties, as well as the possibility of criminal tax evasion prosecution resulting in a prison sentence.

As the IRS battle with Bitcoin heats up you should give serious consideration to taking proactive steps as a digital currency investor.  If you have accounts with Coinbase, Inc. or another Bitcoin or digital currency agency you should contact the experienced San Diego tax attorneys at Allen Barron for a free consultation at 866-631-3470.  It is better to file amended returns before the IRS contacts you for an audit.

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