2017 was a transformative year for cryptocurrency – or at least, set the stage for 2018 to be. The year began on shaky footing for Bitcoin exchange Coinbase, which was forced to produce approximately half a million customer records late in 2016 by the Internal Revenue Service (IRS). Though Coinbase successfully petitioned the courts for a drastic reduction in the scope of the original summons, which was eventually narrowed to roughly 14,000 users, the case shone a spotlight on the issue of cryptocurrency regulation – an issue which lawmakers continued pressing throughout the year. In May, Senator Chuck Grassley (R-Iowa) introduced S. 1241, otherwise known as the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017, which if passed would compel a Congressional report “detailing a strategy to interdict and detect… digital currencies… at border crossings and other ports of entry for the United States.” The following month, the House Terrorism and Illicit Finance Subcommittee, a subcommittee of the House Financial Services Committee, held a hearing on “the national security implications of virtual currencies such as Bitcoin.” If this pattern holds, 2018 is bound to be even rockier – which means Bitcoin users should begin taking steps to mitigate possible fallout now.
On May 25, 2017, Republican Senator Chuck Grassley of Iowa introduced S.1241, the full text of which can be viewed online on Congress’ website.
The stated purpose of the bill is to “improve the prohibitions on money laundering,” which are currently governed by the Money Laundering Control Act of 1986. For obvious reasons, the original law, which is bifurcated into two statutes – namely 18 U.S. Code § 1956 (Laundering of monetary instruments) and 18 U.S. Code § 1957 (Engaging in monetary transactions in property derived from specified unlawful activity) – does not address cryptocurrency, which it predates by more than 20 years. (For context, the history of cryptocurrency begins in 2009 with the creation of Bitcoin.)
Section 13 of the bill, which deals with “prepaid access devices, digital currencies, or other similar instruments,” provides the following:
“Not later than 18 months after the date of enactment of this Act, the Secretary of Homeland Security, in consultation with the Commissioner of U.S. Customs and Border Protection, shall submit to Congress a report—
(1) detailing a strategy to interdict and detect prepaid access devices, digital currencies, or other similar instruments, at border crossings and other ports of entry for the United States; and
(2) that includes an assessment of infrastructure needed to carry out the strategy detailed in paragraph (1).”
In other words, the bill, if passed, will require the government to pay closer attention to Bitcoin and other virtual currencies leaving or entering the United States. This would likely impact existing Bitcoin-related FBAR requirements, under which taxpayers are required to disclose foreign cryptocurrency accounts or wallets with values exceeding $10,000. (For additional information about FBAR and who is affected, see our articles on FBAR audits, FBAR penalties, and reporting Bitcoin on an FBAR.)
As of November 2017, the bill was undergoing consideration by the Senate Judiciary Committee, which is chaired by Senator Grassley. GovTrack, a website which posts progress updates on proposed laws, gives the bill an “18% chance of being enacted.”
It is worth mentioning that, unrelated to Bitcoin, the bill also expands provisions for “civil asset forfeiture,” an already-controversial process by which government authorities may, under certain circumstances, seize assets – typically cash exceeding a $10,000 threshold – from citizens suspected of criminal activity, such as suspected offenses involving money laundering.
Our cryptocurrency tax attorneys will keep this section brief, having previously discussed this topic in an earlier entry of our tax law blog. However, to provide a quick summary for our newer readers, less than two weeks after Senator Grassley introduced his bill in the Senate, the House Terrorism and Illicit Finance Subcommittee conducted a two-hour hearing, which can be watched here, urging the government to clamp down on foreign digital currency exchanges in an effort to curb cybercrime, terrorism, and, related to Senator Grassley’s bill, money laundering. Scott Dueweke, president of The Identity and Payments Association, urged lawmakers to “find a way to target these criminal currency exchanges, often sheltered in countries where officials protect and even profit from them.”
The IRS has already taken steps to pry records of “anonymous” Bitcoin transactions from Coinbase, exposing thousands of people to the threat of civil and perhaps even criminal penalties. Depending on what happens in Congress this year, lawmakers may hand the IRS even stronger tools to enforce compliance. Bitcoin transactions may have “flown under the radar” in the recent past – but if the spate of recent court cases and Congressional developments are any indicator, we are rapidly passing into an era of heightened scrutiny and tougher penalties.
If you currently sell, purchase, or invest in Bitcoin, or have taken these actions during the past several years, you are urged to consult with an experienced Bitcoin tax attorney, like the tax and accounting professionals at the Tax Law Office of David W. Klasing. Our skilled international tax attorneys can review your financial records to determine whether you are in compliance with the complicated, often confusing regulations growing around foreign and domestic cryptocurrency. Where necessary, we can develop a robust strategy for approaching an audit or criminal charge stemming from unreported income or capital gains. To arrange a reduced-rate consultation concerning Bitcoin reporting requirements, a Coinbase audit, FBAR compliance, or related tax matters, contact our tax law offices online, or call us at (800) 681-1295 today.
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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