Many people who have bought, sold, or traded Bitcoin or other digital currencies are aware that the IRS has taken an interest in their activities. While many people may believe that their Bitcoin activities were a mere hobby that could not possibly result in negative tax consequences, the reality suggests that users of Bitcoin who have failed to account for capital gains and other tax obligations could face penalties and fines. If you engaged in a scheme to avoid or evade income taxes, however, penalties can be much harsher and may include a federal prison sentence.
Many people have heard that the IRS was attempting to obtain the account records of Coinbase users. While many people are aware of this fact, they may not understand what a John Doe summons is or its likelihood of success. As a starting point, it is essential to recognize that the IRS has previously used this tactic to successfully crackdown on the fraudulent use of offshore credit cards and foreign accounts and entities to commit offshore tax evasion. In a number of subsequent enforcement proceedings against taxpayers, the John Doe summons was the first step in discovering the accountholder’s real world identity.
Thus, in this case, it is highly likely that Coinbase will be required to turn over relevant account information relating U.S. citizens, tax residents, and others with U.S. tax obligations. In fact, on November 30, 2016, a federal court granted the IRS’s request. While Coinbase and individual account holders have vowed to fight the release of this information, it is highly likely that the IRS will prevail. Once the IRS has this data, it will likely engage in processing to identify taxpayers who have concealed income, failed to pay capital gains or income taxes, or otherwise engaged in improprieties with Bitcoin.
If you have sold Bitcoin, been paid for work performed in Bitcoin, paid employee wages in virtual currency, or engaged in an array of other transactions it is prudent to seek the advice and guidance of a tax attorney. You should contact a tax lawyer because if you are concerned about potential criminal tax charges, only the attorney-client privilege is sufficient to protect the disclosures you may make when seeking legal guidance. If you make these same disclosures to an accountant or CPA, it is extremely likely that the IRS will subpoena the CPA and he or she will become the government’s number one witness against you.