If you’re a regular visitor to our tax law blog, you may have seen some of our previous articles discussing Bitcoin, an anonymity-geared virtual currency used by millions of U.S. taxpayers. Bitcoin’s value has soared since its inception in 2009, climbing from mere fractions of a cent ($0.08 in July 2010) to its impressive present-day value: close to $17,000, as of December 2017. As Bitcoin and other cryptocurrencies grow in worth and popularity, our Bitcoin tax attorneys have seen the Internal Revenue Service (IRS) take increasingly aggressive measures – including the use of subpoenas against top U.S. cryptocurrency exchange Coinbase – to detect taxpayers who fail to report capital gains and/or foreign income derived from Bitcoin transactions. Thus, it is critical for Bitcoin miners, sellers, and investors to understand some basic facts about the reporting requirements to which they are subject, as failure to comply with the law could result in the imposition of devastating civil and/or criminal penalties.
Reporting Capital Gains from Bitcoin Sales
Last year, the IRS locked horns with popular Bitcoin exchange Coinbase, seeking court approval, against the company’s wishes, to obtain detailed transaction data concerning hundreds of thousands of users. For Coinbase, the objective was to protect customer privacy and maintain its reputation for providing security. For the IRS, the objective was to uncover financial information that could be used to detect tax violations, which could result in penalties, restitution, and/or even prison time depending upon the account or wallet in question. Ultimately, the court struck a compromise, upholding the summons but significantly narrowing its scope from approximately half a million accounts to exactly 14,355. That leaves about 14,000 individuals in the IRS’ crosshairs. (For more background on the legal clash between Coinbase and the IRS, see our tax law blog articles here and here.)
Bitcoin is subject to several cryptocurrency reporting requirements, as our cryptocurrency tax attorneys have discussed in previous articles. For example, in situations where Bitcoin is categorized as a “capital asset,” the taxpayer would be obligated to report “capital gains,” meaning profits from the sale of Bitcoins held as capital assets, on Form 8949 (Sales and Other Dispositions of Capital Assets), which should be filed with Schedule D (Capital Gains and Losses) of Form 1040 (U.S. Individual Income Tax Return).
3 Facts About Reporting Foreign Bitcoin Accounts
In addition to being required to report capital gains, taxpayers are also required to report foreign accounts that exceed, at any time during the pertinent tax year, certain thresholds: $10,000 in aggregate for FBAR (Report of Foreign Bank and Financial Accounts) under the Bank Secrecy Act (BSA), and $50,000 in aggregate for Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act (FATCA). In the past, this traditionally meant bank or other financial accounts; but, as taxpayers should be made aware, it can also extend to foreign Bitcoin wallets and exchanges. Thus, taxpayers who use Bitcoin may be required not only to report capital gains on Form 8949, but to:
- File Form 8938 (Statement of Specified Foreign Financial Assets)
- File an FBAR (FinCEN Form 114, also called FinCEN Report 114, previously Form TD F 90-22.1)
Toward that end, there are at least three crucial points which taxpayers should understand about foreign Bitcoin reporting requirements:
- It is not in your best interests to close the account. Do not make the mistake of panicking and closing your foreign Bitcoin account. This will not erase digital records of previous transactions, which the IRS can obtain by using subpoenas (as it already has against Coinbase), then utilizing sophisticated computer software to scrutinize user files. What it will do is suggest that you were trying to cover up wrongdoing, which indicates “willful” (deliberate) nondisclosure, which in turn exposes you to greater penalties – including the risk of criminal prosecution. If you have concerns about a foreign Bitcoin wallet or account, the appropriate course of action is to immediately contact a skilled tax attorney for guidance.
- You may be in jeopardy from whistleblowers. Certain federal laws, such as 26 U.S. Code § 7623, authorize the government to compensate whistleblowers for “detecting underpayments of tax,” or, in some cases, “detecting and bringing to trial and punishment persons guilty of violating,” or attempting to violate, the Internal Revenue Code (IRC). Depending on the situation, you might be at risk of exposure by whistleblowers seeking to capitalize on such laws. The takeaway is that, even if you believe you are safe from IRS detection, it is “better to be safe than sorry,” which segues into the next point:
- The sooner you disclose, the better – but make sure you have legal guidance. The IRS offers programs, such as the Offshore Voluntary Disclosure Program (OVDP), which allow taxpayers to receive lighter financial penalties in exchange for voluntarily reporting past noncompliance with offshore reporting requirements. Depending on your circumstances, participating in the OVDP may be beneficial to you. However, due to the immense complexity (and high legal stakes) involved in these matters, you should review your options with an international tax law attorney before contacting the IRS.
Contact Our International Bitcoin and Cryptocurrency Tax Attorneys
If you routinely use, sell, purchase, gift, mine, compensate employees with, or otherwise use Bitcoin or other virtual currencies, you could be in violation of tax reporting laws without even realizing it. Bitcoin tax legislation is in a murky, nascent state of development – and with the IRS prioritizing Bitcoin audits and investigations for tax evasion, it is all too easy for well-meaning taxpayers to become trapped between confusing regulation and aggressive enforcement.
An experienced Bitcoin tax lawyer from the Tax Law Office of David W. Klasing can help you understand the law and protect your privacy rights, while taking steps to ensure that you follow appropriate measures for complying with the Internal Revenue Code. To discuss your Bitcoin tax matter with an experienced tax attorney, CPA, or EA, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
Here is a link to our YouTube channel: click here!
Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
Here is a link to our practice video on warning signs than an audit has gone criminal.
What is an eggshell tax audit?
https://www.youtube.com/watch?v=saJLVlER-iM
What is an effective tax defense in an IRS eggshell tax audit?
https://www.youtube.com/watch?v=7qixPqWTtvA
So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
https://www.youtube.com/watch?v=NDwc4GUfBX8
