Treasury Secretary Steve Mnuchin Worried Bitcoin, Digital Currencies Becoming the New “Swiss Bank Account”

A string of high-ranking government officials, including Indian Prime Minister Narendra Modi, British Prime Minister Theresa May, and U.S. Treasury Secretary Steve Mnuchin, recently expressed concerns that cryptocurrencies, such as Bitcoin and Litecoin, could replace traditional tax havens to become, in Mnuchin’s words, the next “Swiss bank account.” However, as the adage goes, “Those who do not learn from history are doomed to repeat it” – and history shows us that the Internal Revenue Service (IRS) and Department of Justice (DOJ) have traditionally taken aggressive approaches to both Swiss banks and their clients. If Bitcoin truly is the new Swiss bank account, that makes Bitcoin users the new Swiss Bank account holders – which, as anyone who followed the development of the Swiss Bank Program or Offshore Voluntary Disclosure Program (OVDP) already knows, is bad news for thousands of taxpayers. If you currently use or recently maintained a domestic or foreign Bitcoin wallet or account, including an account with Coinbase, it is in your best interests to examine your tax obligations with an experienced Bitcoin tax attorney. The sooner you take action to come into compliance, the better equipped you will be for avoiding or reducing the financial penalties resulting from failure to report income, failure to report foreign accounts, or failure to report capital gains realized from Bitcoin transactions.

Are Cryptocurrency Exchanges Headed for the Same Fate as Swiss Banks?

Surprisingly, the Internal Revenue Code (IRC) does not establish a clear definition of the term “tax haven.” However, the phrase has historically been construed to mean any territory, state, or nation with low or nonexistent income tax rates. Typically, these “tax havens” are also marked by low levels of transparency (and conversely, high levels of banking secrecy).

Because this combination creates an ideal climate for tax fraud, tax havens are closely scrutinized by the IRS and DOJ, which have, in recent years, implemented initiatives like the Swiss Bank Program and OVDP as part of an ongoing effort to uncover foreign bank accounts previously concealed by U.S. taxpayers and foreign financial institutions (FFIs).

Though widespread noncompliance persists, the federal government has achieved a measure of success with these programs, with the IRS noting in one news release, “Since the first Offshore Voluntary Disclosure Program opened in 2009, there have been more than 50,000 disclosures and we have collected more than $7 billion from this initiative alone. The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. We have also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.”

Dozens of specific examples, all connected to Swiss banking giant UBS, are highlighted in another IRS statement on offshore tax avoidance and IRS compliance efforts. The numbers don’t paint a particularly promising picture for taxpayers. A quick perusal reveals a “civil penalty of $3,140,346”; two years in prison and $15,518,382 in restitution; one individual who “paid more than $53 million in a civil penalty, as well as approximately $27 million in back taxes and interest.”

What does any of this, alarming as it all sounds, have to do with virtual currency? If politicians like May, Modi, and Mnuchin are correct – and it seems that they may be, at least to New York-based multimillionaire David Drake, who, according to Bloomberg Markets, uses “digital money like an offshore bank account – a place to legally park overseas business profits and reduce U.S. taxes” – then stricter regulations (and with them, tougher enforcement measures) are looming over the cryptocurrency sphere. According to Drake, who “said he follows U.S. law by reporting his companies’ holdings,” “Every country is scrambling to come up with an answer. There needs to be a regulated structure that won’t kill the industry.”

As our virtual currency tax lawyers have discussed in earlier articles, this “regulated structure” is already under fast-paced construction. In late 2016, for instance, the IRS obtained court approval to examine thousands of Coinbase user records. Midway through 2017, both chambers of Congress took action to impose greater regulation on cryptocurrency transactions. And in May 2018, the government will roll out new laws compelling financial institutions, including cryptocurrency exchanges, to verify the identities of account-holders.

Speaking at an event moderated by the Economic Club of Washington in January 2018, Mnuchin explained, “In the United States… if you have a wallet to own [B]itcoins, that company has the same obligation as a bank to Know Your Customer. So, in the United States, we have rules for anti-money-laundering, for all different types of entities, we can track those types of [transactions]. The rest of the world doesn’t have that. So one of the things we are working very closely with the G-20 on is making sure that this doesn’t become the Swiss numbered bank account.” For context, “the G-20” is a global economic forum whose members currently include the United States, Australia, Mexico, Saudi Arabia, and the European Union.

Bitcoin Tax Attorneys Can Help You Comply with Reporting Requirements

KYC rules, increased enforcement, the risk of substantial financial penalties or even criminal prosecution – does any of this sound familiar?

If Bitcoin is the new Swiss bank account, don’t let yourself become a target of the new Swiss Bank Program. With the IRS Criminal Investigation Division, through the recent creation of the International Tax Enforcement Group (ITEG) and Nationally Coordinated Investigations Unit (NCIU), gearing up to make 2018 the year of digital currency tax compliance, now is the time to address any outstanding tax questions related to mining, buying, selling, gifting, storing, or compensating employees with Bitcoin, Dash, Monero, or other virtual currencies.

If you have any concerns about Bitcoin tax compliance, the safest and most efficient course of action is to discuss potential remedies with a knowledgeable cryptocurrency tax attorney – ideally, before you receive a Coinbase account audit notice from the IRS. For a reduced-rate consultation on Bitcoin tax compliance at the state, federal, or international level, contact the Tax Law Office of David W. Klasing online, or call our experienced tax attorneys 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.