From inception, Bitcoin has been synonymous with privacy and anonymity due to the fact that users do not need to provide personal identifying information in order to send or receive this virtual currency. Instead of being connected to a debit card or credit card, transactions are associated with unique addresses and are stored in a “blockchain,” in which the building “blocks” are actually tamper-resistant digital records. However, while Bitcoin arguably gives savvy users an enhanced degree of privacy on the web, total anonymity is not guaranteed, nor are transaction records impenetrable. In fact, the Internal Revenue Service (IRS) recently obtained a summons to investigate thousands of Bitcoin transaction records. As of December 2017, the summons is restricted to a narrow band of transactions on Coinbase, a popular online exchange, during the years 2013 through 2015. However, the summons may establish a precedent for the IRS to take similar actions against other Bitcoin exchanges in the future.
In any event, when a cryptocurrency investor goes to fiat (US Dollars) the deposit to their bank account will most likely generate an automatic record if in excess of $10,000 that will be received by the IRS and which will be available to all of the various state governments as they share information with the IRS. It is a felony to structure cash deposits to be less than $10,000 to avoid this automatic IRS reporting by the bank.
Can the IRS See My Bitcoin Transaction Records?
Our Bitcoin tax attorneys have, on several occasions, written about the legal battle between Coinbase and the IRS in our tax law blog. However, in case you missed our previous Coinbase articles, allow us to provide a brief summary.
After receiving recommendations from the U.S. Treasury Inspector General for Tax Administration (TIGTA) to update and strengthen aging regulatory guidelines for reporting Bitcoin and other virtual currencies, the IRS successfully sought a broad and controversial “John Doe” (anonymous) summons. In its original form, the John Doe summons would have allowed the Service to force hundreds of thousands of records from Coinbase, echoing events of 2008, when the IRS was authorized to use a John Doe summons to request account information from Swiss bank UBS.
As Coinbase officials noted in this blog post, the company later convinced the court to narrow the scope of the original summons, shortening its legal reach from approximately 480,000 Coinbase user records to approximately 14,000. Specifically, the narrowed summons authorizes the IRS to investigate transactions exceeding $20,000 carried out during 2013, 2014, and 2015, including sending, receiving, selling, and purchasing Bitcoin.
The takeaway message for taxpayers? If you used Coinbase to conduct any major transactions during 2013, 2014, or 2015, you should immediately review your financial records with an experienced tax attorney, who can (1) determine whether you are in compliance with Bitcoin reporting requirements, (2) take appropriate steps to bring you back into compliance where necessary, and (3) provide aggressive representation if you are audited or criminally investigated by the IRS as a result of unreported or underreported Bitcoin transactions. This segues nicely into the next question for taxpayers, which is…
What Steps Should I Take if I Did Not Report Foreign Income or Capital Gains from Bitcoin / Cryptocurrency?
Though cryptocurrency tax regulation is in a state of flux, it is generally understood that Bitcoin users must report, where the relevant thresholds are exceeded:
- Capital gains realized through sale of Bitcoin held as capital assets.
- Foreign income, including foreign Bitcoin wallets/accounts.
- Specifically, for business owners: any payments you made to your employees and/or independent contractors using Bitcoin or other virtual currencies.
If you failed to meet these requirements, or are uncertain as to whether you complied properly, there are steps you can take to minimize your risk of incurring fines (or worse, criminal penalties). Depending on which reporting requirements you are subject to, and the nature of the noncompliance, it may be appropriate to:
- Create a corrected Form W-2 (Wage and Tax Statement) using Form W-2c (Corrected Wage and Tax Statements), if you paid your employees in Bitcoin.
- File a corrected Form 1099-MISC (Miscellaneous Income), if you paid independent contractors in Bitcoin.
- File an amended tax return, or Form 1040X (Amended U.S. Individual Income Tax Return), with an attached corrected version of Schedule D (Capital Gains and Losses).
- File an FBAR (Report of Foreign Bank and Financial Accounts, also known as FinCEN Form 114) and/or Form 8938 (Statement of Specified Foreign Financial Assets) to disclose foreign Bitcoin wallets.
- Participate in the Offshore Voluntary Disclosure Program (OVDP), provided you are accepted into the program, to reduce potential penalties and avoid criminal prosecution.
- Make a loud or quite Domestic Voluntary Disclosure.
Get Tax Help from an Experienced International Bitcoin Tax Attorney
While taking these steps may help to reduce potential fines or even shield you from prosecution, it is essential that you discuss your situation with an experienced Bitcoin tax lawyer before you contact the IRS; otherwise, you risk exacerbating your situation, or even inadvertently incriminating yourself. If you have any questions about reporting Bitcoin or other virtual currency transactions to the IRS, do not hesitate to contact the Tax Law Office of David W. Klasing online, or by calling (800) 681-1295, to schedule a reduced-rate consultation with a knowledgeable tax attorney, CPA, EA, or attorney-CPA from our respected team. Though based in California, we also handle out-of-state and international tax matters on behalf of businesses and individuals.
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?
