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The IRS is Coming after Coinbase Users

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The IRS is Coming after Coinbase Users

In the last decade, virtual currency has exploded onto the scene as both an attractive investment for investors and an acceptable form of payment at many large companies and organizations, especially those in the tech industry. As these investments have become more and more common, many folks have come to our skilled dual licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing with questions about the tax consequences of their holdings in Bitcoin or other types of virtual currency. Unfortunately, however, many people who hold cryptocurrency still do not realize, or simply ignore, their tax and reporting requirements and can end up facing serious civil and criminal trouble down the line. Recently, our dual licensed Tax Lawyers & CPAs have been following increased IRS enforcement activity involving the virtual currency exchange site Coinbase and those who hold cryptocurrency on this brokerage without properly reporting it for tax purposes.

What is Coinbase?

Coinbase is an online exchange where people can buy and sell cryptocurrency. Because Bitcoin and other types of virtual currency are nothing more than a computer code, they are stored in online “wallets” or accounts on exchange sites like Coinbase. Transactions are powered by an open source code called “blockchain” which keeps anonymous, secure records of every transaction involving a single bitcoin to ensure there is no forgery or fraud. Coinbase also offers current valuation of the different types of cryptocurrency, functioning sort of like the stock market in showing which types are selling at higher or lower prices on the day.

How do Taxes on Virtual Currency Work?

For tax purposes, the most important thing to note about Bitcoin and other cryptocurrencies is that the IRS treats them as property, rather than a form of currency. This means that tax laws which apply to property, such as the capital gains tax, apply to the buying and selling of virtual currency on exchanges like Coinbase. As such, while the acquiring of the virtual currency is not a taxable event, you still must keep a record of the amount the bitcoin was worth on the open market, tracked through the exchange rate on Coinbase and elsewhere, when you purchased it. This is because when you eventually sell the bitcoin, you will subtract the market value of the bitcoin on the day you bought it from the selling price, and this is the amount that the IRS will tax.

How tax is assessed on each bitcoin will depend on how long you owned it before selling and how you acquired each coin in the first place. For bitcoins that you held for less than a year, the short-term capital gains tax will apply at a rate equivalent to your ordinary graduated income tax bracket. If you held the bitcoin for more than a year, however, it will be subject to the long-term capital gains tax, at a rate of 0-20 percent depending on your income bracket when you sell. If it is sold for a loss, you may qualify for a reimbursement by the IRS. Cryptocurrency that was mined is taxed at is fair market value at issuance as ordinary income subject to self-employment tax.

Intense record-keeping must occur to keep track of all the information on gains and losses you will be required to report to the IRS for your taxes to be assessed. It can be helpful to have a tax professional like the Bitcoin and virtual currency dual licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing assist you in ensuring your records are complete and up to date and that your cryptocurrency transactions are properly reported. Failure to report this property on your return as required can result in serious civil and even criminal penalties.

New Coinbase Transparency Report Shows the IRS is Coming after Coinbase Users for Failure to Report Virtual Currency Holdings

In October 2020, Coinbase released its first-ever transparency report, and some of the information contained in this report should serve as a major wake-up call to taxpayers who have failed to report virtual currency held in this or another exchange in years past. The data shows that the IRS, and its Criminal Investigation Unit, has been one of the top receivers of information from Coinbase, alongside the FBI and CIA. This data makes it clear that the IRS is requesting information from Coinbase for the express purpose of checking it against its own taxpayer data and looking for discrepancies where holdings on Coinbase have not been reported on taxpayers’ returns.

If you have failed to report holding Bitcoin or other virtual currencies on your past returns or filed an incomplete or misleading picture of your cryptocurrency holdings, the time to act to correct this is now. Once an audit or investigation has begun, it will be too late to amend your returns or take advantage of a voluntary disclosure program. By reaching out to one of our skilled tax attorneys and CPAs at the Tax Law Offices of David W. Klasing, you can rest assured you will receive the best possible advice about how to correct past errors, mitigate any damage that has already occurred, and prevent future mistakes from occurring by adopting a system of best practices for keeping track of the numbers that must be reported on future returns involving cryptocurrency.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including several years of willfully non-reported cryptocurrency income generating transactions coupled with affirmative evasion of U.S. income tax on offshore crypto income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

If You Are a Coinbase User Who Has Failed to Properly Disclose Information about Your Cryptocurrency Holdings to the IRS, Contact Our Firm Today

It is clear by looking at the transparency report release that the exchange has been sharing large amounts of user information with the IRS and its criminal investigation unit. As such, it is important to act quickly if you are a user of the exchange who has failed to make proper accountings of your cryptocurrency holdings to the IRS in past years. At the Tax Law Offices of David W. Klasing, our experienced dual tax attorneys and CPAs can assess the particulars of your situation and work to get you back into compliance with as few repercussions as possible. Call us today at (800) 681-1295 to schedule a consultation.

More Questions and Answers About Bitcoin

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Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

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