Those who have invested in Bitcoin and other virtual currencies should take heed as the IRS establishes an enforcement initiative for cryptocurrencies and how US taxpayers report these on all tax returns. The IRS believes millions of transactions involving US taxpayers have occurred with exchanges such as Coinbase, and is concerned about the lack of associated reporting on IRS tax returns. The agency has further taken the position that cryptocurrencies should be legally characterized as “property” and not in the same manner as any foreign currency with the backing of a sovereign government would be treated.
From a tax perspective, the issue becomes “capital gains.” If you own an asset and it appreciates in value, and you use that asset to purchase another asset the IRS could (and would) argue you have experienced a taxable event and realized a capital gain. Will you be able to use it in a Section 1031 like kind exhange? As a US taxpayer you may need to report taxable gains and losses in virtual currency transactions on IRS Form 8949 which would be attached to Schedule D of your federal tax return. If you are paying an independent contractor with virtual currency you would be responsible for reporting the value of the payment on a 1099 and the contractor must report the “income.”
Many other important questions arise, such as where your virtual accounts are housed. If your exchange and accounts are offshore are you required to report those accounts and values on the IRS FBAR? While the IRS has left the regulations a bit vague on many of these questions there is one action which is quite clear: allegations of under-reporting of income and the failure to pay income taxes on cryptocurrency transactions was the basis for the request and ultimate issuance of a John Doe summons to Coinbase late last year. The IRS is pursing information which will be followed by IRS audits and the potential for substantial exposure to IRS collection efforts for US taxpayers who have invested in cryptocurrencies. When the IRS establishes an enforcement initiative for cryptocurrencies and follows the same legal strategy it did with Swiss Banks and FBAR compliance, US taxpayers are on notice. The IRS is coming after virtual currency investors. We invite you to contact us or call 866-631-3470 for answers to your international, federal, state or local tax questions.
