IRS Bitcoin Enforcement: Four Suggestions for Cryptocurrency Investors

by M. Robinson & Company, P.C.
Contact

In January 2018, an individual investor visited my office and asked me to prepare income tax returns based on his cryptocurrency trading gains.  This individual used U.S. dollars to buy Bitcoins.  He proceeded to trade in and out of other cryptocurrencies (“altcoins”) on a major trading exchange.  When he first called my office, Bitcoin had recently reached its peak exchange rate of about $19,000 USD per Bitcoin unit on December 17, 2017.  My client had multiplied his money tenfold.  Unfortunately, the volatility in the cryptocurrency market wiped out more than half of his unrealized gains in just over a month.  Eventually he decided that he was not ready to come into tax compliance, and we parted ways with mutual best wishes.

 IRS Enforcement Efforts

My former client had planned to come forward voluntarily to comply with the IRS reporting requirements under IRS Notice 2014-21, which states that the IRS will treat Bitcoin as property for recognition of gains and losses.  However, the IRS faces a significant challenge in its quest to encourage voluntary compliance.  Many taxpayers will only comply voluntarily if they reasonably expect that noncompliance could lead to adverse consequences.  The IRS has assigned a team of 10 investigators to begin enforcement action against tax cheats who use the anonymity of cryptocurrency to hide income and assets from the government.  See: “IRS Cops Are Scouring Crypto Accounts to Build Tax Evasion Cases” by David Voreacos, Bloomberg News, February 8, 2018.  For a current analytical perspective on the difficulty IRS may have in enforcing tax laws on cryptocurrency investors, see: “Tax Compliance in a Decentralizing Economy” by Manoj Viswanathan, The Georgia State Law Review (February 21, 2018).

Four Suggestions for Cryptocurrency Investors

I offer four key suggestions to cryptocurrency investors and their professional advisers:

First, I predict that the IRS and other government regulatory agencies will catch up to the enforcement challenges posed by the anonymity of cryptocurrency ownership.  Just as the IRS managed to obtain information on U.S. account holders at foreign banks such as UBS, so too the IRS will obtain records from major Bitcoin trading platforms.  Already in November 2017, the IRS won a significant victory when a U.S. District Court judge in San Francisco upheld an IRS subpoena seeking records of selected U.S. account holders in Coinbase.

Second, it is possible that when IRS enforcement catches up with non-compliant Bitcoin investors, the IRS may offer a voluntary disclosure program similar to the one currently available for holders of offshore bank accounts.  Under the current OVDP program, taxpayers who come forward voluntarily are not criminally prosecuted. The penalty rates, however, differ significantly. The penalty for intentional tax violators varies between 27.5 and 50 percent of the value of undisclosed assets. The penalty for unintentional violators is reduced to 5 percent of the value of undisclosed assets. Thus, Bitcoin investors cannot expect that they can participate in a possible voluntary disclosure program without experiencing some financial pain.

Third, Bitcoin investors and traders should keep good records for tax accounting purposes.  My former client (see above) used a trading platform that kept records of his transactions readily available only for the preceding six months or so.  My tax accounting work was made more complicated by the lack of complete records.

If IRS offers a voluntary disclosure program, it will provide a limited look-back period—for example, the filing of tax returns for three to six years preceding the disclosure date.  Since some Bitcoin exchanges do not retain customer data going back that far in a readily accessible format, those customers should diligently retain their own records. The retention of full records, however, may suggest that the failure to comply was intentional, thereby preventing taxpayers from enjoying the lower penalty rates discussed above.

Finally, I urge all Bitcoin investors to comply with the law. Many taxpayers with offshore accounts lived to regret their non-compliance with the bank disclosure laws. Over 56,000 taxpayers paid more than $11 billion in penalties, according to an IRS press release dated March 13, 2018.  Many individuals also suffered intense anxiety, and some paid significant legal fees. A few people went to jail for criminal tax evasion.  Therefore, tax honesty remains the best policy.

For more information on IRS taxation of Bitcoin, please see our prior blog post: “The United States Taxation of Bitcoins and Transactions Denominated in Bitcoins” by Attorney Morris N. Robinson, The Massachusetts Tax Alert (January 6, 2016).

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© M. Robinson & Company, P.C. | Attorney Advertising

Written by:

M. Robinson & Company, P.C.
Contact
more
less

M. Robinson & Company, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.