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.
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).
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:
Toward that end, there are at least three crucial points which taxpayers should understand about foreign Bitcoin reporting requirements:
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.
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Foreign income and information non-compliance
Here is a link to our practice video on warning signs than an audit has gone criminal.
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