IRS Increases Focus on Criminal Prosecution of Cryptocurrency Tax Evasion: What You Need to Know before Tax Day

by Blank Rome LLP

Blank Rome LLPIn 2017, the world witnessed virtual currency investors become millionaires seemingly overnight with cryptocurrencies, such as Bitcoin, climbing from $830 to $19,300.1 As tax day approaches (April 17, 2018), cryptocurrency investors should be aware of their tax liabilities.

People Are Underreporting Cryptocurrency and the IRS Has Noticed

Out of 120 million tax returns between 2013 and 2015, less than 900 taxpayers reported cryptocurrency gains.2

On November 17, 2016, the IRS issued a summons to Coinbase, the largest cryptocurrency exchange in the United States, seeking information related to cryptocurrency transactions.3 Coinbase resisted the summons and litigated the dispute in the Northern District of California. A year after the summons was issued, Coinbase was ordered to produce certain documents for all transactions valued at least $20,000 between 2013 and 2015.4

It is estimated that the information of approximately 14,000 customers out of the 5.9 million Coinbase5 users will be produced to the IRS under this order.6

In addition, the IRS has assembled a specialized task force in the Criminal Investigation Division to target individuals who attempt to evade paying taxes on their cryptocurrency earnings.7 With the help of other criminal agents, both foreign and domestic, the cryptocurrency task force is using prior experience gained in tracking cryptocurrency by working on hundreds of identity-theft cases to build cases against cryptocurrency tax evaders.8

Early data for 2017 tax returns (representing approximately 13 percent of 2017 tax returns) suggests that taxpayers are still underreporting. Out of the estimated seven percent of Americans who own cryptocurrency, only .04 percent of these tax returns report cryptocurrency gains and losses.9

Uncle Sam Is Entitled to a Portion of Your Cryptocurrency Gains

Although the IRS has offered little guidance as to the intricacies of various cryptocurrency tax requirements, one thing is clear: the IRS treats cryptocurrency as property for tax purposes. In 2014, the IRS issued Notice 2014-21,10 confirming virtual currencies, such as Bitcoin, that can be converted into traditional currencies are subject to tax laws.

This means that the following transactions may result in capital gains or losses:11

  • Cryptocurrency investments with a duration over a year
  • Trading cryptocurrencies
  • Exchanging tokens
  • Spending cryptocurrency
  • Air drops when sold

With the following transactions likely constituting ordinary income:12

  • Cryptocurrency investments with a duration under a year
  • Receiving payment in crypto
  • Air drops when received
  • Mining coins
  • Initial coin offerings

Can Taxpayers Defer Their Cryptocurrency Gains?

Previous law provided for the deferral of gain on “like-kind” exchanges (via a transferred tax basis) under Section 1031 of the Internal Revenue Code for a variety of assets. This rule allowed for the deferral of gain on real estate, tangible personal property such as artwork and livestock, and certain intangible property. While Section 1031 specifically exclude stocks, bonds, notes, and indebtedness, there is no mention of virtual currency.13

Whether crypto-to-crypto trades can be treated as like-kind exchanges for cryptocurrency transactions in 2017 is debatable as the IRS has offered little guidance. Taxpayers who intend to report their cryptocurrency gains for year 2017 under Section 1031 should consult a knowledgeable tax professional.

The recently-passed tax bill significantly reduces the scope of Section 1031 by eliminating the deferral of gain on all like-kind exchanges except for real property.14 Thus, all cryptocurrency transactions after December 31, 2017 will certainly not qualify as a tax-deferred transactions.

The Bottom Line

The IRS has made clear that cryptocurrency gains must be reported and taxpayers will face penalties for noncompliance. Taxpayers should be cautious in reporting their tax liabilities for cryptocurrencies and may want to either consider prior tax treatment of similar investments or consulting a tax professional.  

U.S. v. Coinbase, Inc., No. 17-CV-01431-JSC, 2017 WL 5890052, at *8–9 (N.D. Cal. Nov. 28, 2017).

Coinbase, 2017 WL 5890052, at *8–9 (ordering Coinbase to provide documentation for accounts with “at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period”).

Investors who use platforms other than Coinbase should not feel impervious to the IRS as it is likely other cryptocurrency platforms are receiving similar demands following the Coinbase victory.

6 Riley, U.S. v. Coinbase: Virtual Currency Holders Not Outside the IRS’s Reach, Lexology.

13 26 U.S.C. § 1031.


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.

© Blank Rome LLP | Attorney Advertising

Written by:

Blank Rome LLP

Blank Rome LLP 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):

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.


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 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:

- 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.