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Why Bitcoin Users on Coinbase Should Be Worried About the IRS

3 Facts Taxpayers Should Understand About Bitcoin and FBAR Reporting Requirements
3 Facts Taxpayers Should Understand About Bitcoin and FBAR Reporting Requirements
December 20, 2017
Why is the IRS Investigating Coinbase Users for Unreported Bitcoin Transactions?
Why is the IRS Investigating Coinbase Users for Unreported Bitcoin Transactions?
December 22, 2017

Why Bitcoin Users on Coinbase Should Be Worried About the IRS

Why Bitcoin Users on Coinbase Should Be Worried About the IRS

Our Bitcoin tax attorneys have witnessed the value of Bitcoin, a virtual currency or cryptocurrency first used in 2010, explode during the past several years. As its value has increased, so has Bitcoin’s popularity, with millions of transactions conducted during 2015 alone. As Bitcoin becomes more widely-used, cryptocurrency transactions exert an increasingly powerful influence on the greater economy, which, unsurprisingly, translates to greater scrutiny and tighter regulation by the federal government. Specifically, the Internal Revenue Service (IRS) obtained court approval last year to issue a John Doe summons to identify thousands of Coinbase users whose transactions exceeded certain thresholds. While Coinbase achieved partial success in limiting the scope of the summons, thousands of Coinbase users are still at risk of being audited, hit with civil penalties, and, depending on the circumstances, even criminally prosecuted.

Coinbase Users Beware: IRS Examining Customers’ Transaction Data for Hidden Income

According to a press release issued November 30, 2016 by the Department of Justice (DOJ), “A federal court in the Northern District of California entered an order today authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015. The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.”

Initially, close to half a million Coinbase users would have been forced to disclose their digital records reflecting Bitcoin transactions. However, Coinbase representatives persuaded the Court to dramatically limit the summons, reducing the number of impacted users from more than 480,000 to fewer than 15,000 – 14,355, to be precise. According to court records concerning the narrowed summons, which can be viewed here, “The United States seeks information… for users… with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-15 period.” This excludes users who “only bought and held bitcoin during 2013-15 period,” as well as users “for [whom] Coinbase filed Forms 1099-K during the 2013-15 period.”

According to court documents, the government will seek information including:

  • Account opening records
  • Addresses
  • Agreements and instructions granting third parties “access, control, or approval authority”
  • Copies of driver’s licenses/passports
  • “[C]orrespondence between Coinbase and the… user or any third party with access to the account/wallet/vault opening, closing, or transaction activity”
  • Dates of birth
  • Names
  • Tax Identification Numbers (TIN)
  • Wallet addresses, which are public web addresses associated with Coinbase accounts, as well as any public keys for such wallets (in addition to keys for vaults and accounts)

While there has been some confusion as to whether Bitcoin is treated as property or currency – on one hand, the IRS has clearly stated that “virtual currency is treated as property for U.S. federal tax purposes,” but on the other, treats foreign Bitcoin exchanges like foreign financial institutions (FFIs) in requiring certain Bitcoin users to comply with the Foreign Account Tax Compliance Act (FATCA) or file an FBAR (Report of Foreign Bank and Financial Accounts) – what is clear is that (1) capital gains and/or losses resulting from Bitcoin transactions must be reported using Form 8949 (Sales and Other Dispositions of Capital Assets), yet (2) among the millions of transactions that occurred in 2015, well under 1,000 were actually disclosed. If the John Doe summons, taken in combination with the IRS’ years-long crackdown on unreported foreign accounts, is any indicator, a similar crackdown on Bitcoin accounts, whether located in the United States or overseas, seems just as likely an outcome.

After all, documentation leaked by the Daily Beast shows the IRS contracting with Chainalysis, Inc., a private software company whose “products are targeted at spotting connections between entities on the Bitcoin blockchain.” According to an Ars Technica review featured on the Chainalysis website, “[Chainalysis tool], like no other before it, could accurately trace the history of bitcoin payments and wallets. Moreover, it was able to map wallets into known clusters – that is, mapping addresses to known entities like Silk Road, Coinbase, and other large Bitcoin players.”

Bitcoin Tax Attorneys for Coinbase Users Under IRS Audit or Investigation

If you sold, purchased, sent, or received Bitcoin or other virtual currencies using Coinbase during 2013, 2014, and/or 2015, you should take swift action to ensure total compliance with this complicated and constantly evolving area of tax legislation. You may be at risk of an IRS audit, or even an IRS criminal investigation, if you failed to report foreign income, domestic income, or capital gains from Bitcoin, Litecoin, Ethereum, or other cryptocurrencies.

A knowledgeable and experienced Bitcoin tax lawyer can help you reduce or avoid penalties while guiding you through the necessary court, audit, or tax preparation procedures and protecting your best interests. To discuss your concerns confidentially in a reduced-rate consultation with an experienced virtual currency tax attorney or Bitcoin tax audit lawyer, 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 BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

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Here is a link to our practice video on warning signs than an audit has gone criminal.

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