Throughout 2017, lawmakers and IRS agents worked to tighten existing regulations governing cryptocurrency transactions, notably large transactions made using the virtual currency Bitcoin, which has recently gained media attention – and, more significantly, government attention – for its meteoric rise in value. From the John Doe summons targeting thousands of users on Bitcoin exchange Coinbase, to the hearings held and bills introduced by various members of Congress, the regulatory landscape has begun to transform with increasing momentum, intensifying the pressure on cryptocurrency miners, sellers, traders, and exchanges to report taxable income related to Cryptocurrency. Recent Congressional testimony by Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence, who spoke before the Senate Banking, Housing and Urban Affairs Committee earlier this month, seems to signal that regulatory efforts will ramp up even more in 2018, which may signal the eventual ushering in or new cryptocurrency rules for financial institutions as part of a broader “anti-money laundering” initiative.
On Wednesday, January 17, Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker appeared before a Senate committee to give testimony on “Transnational criminal organizations, drug kingpins, cybercriminals and others [who] likewise seek out vulnerabilities in the global financial system, including by looking to use emerging technologies such as virtual currencies to launder their ill-gotten gains and advance their malicious enterprises.”
Mandelker was not the first individual to recently appear before Congress with warnings about potential connections between cryptocurrency, criminal enterprises, and threats to national security – as our Bitcoin tax attorneys previously wrote about here and here in our tax law blog, the House of Representative’s Financial Services Committee heard testimony on the same subject last summer – which suggests that lawmakers are becoming increasingly focused on prioritizing stronger virtual currency regulation.
Some of the strongest evidence supporting this observation is the upcoming rollout of new laws, scheduled to take effect May 2018, which will require certain financial institutions, including virtual currency exchanges, to comply with “due diligence” standards. As Mandelker noted in her statement, “[W]e are actively engaged with other countries, bilaterally and multilaterally, to encourage them to apply international AML [anti-money laundering]/CFT [combating the financing of terrorism] standards to virtual currency payments. We also prioritize increasing the transparency of shell companies in the U.S. financial system. To that end, we have strengthened one of the fundamental components of our AML/CFT regime: customer due diligence. Treasury’s customer due diligence rule, which takes effect this May, requires covered financial institutions to identify and verify the identity of the beneficial owners of companies at the time of account opening.”
To ensure a higher rate of compliance with the emerging rules, the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department, will assist the IRS in monitoring cryptocurrency wallets and transactions. As Mandelker noted earlier in her statement, “To ensure that virtual currency providers and exchangers know the rules and follow them, FinCEN has prioritized engagement with – and examination of – these entities, focusing both on the approximately 100 that have registered with FinCEN as money transmitters as required, as well as those that have not. As part of the examination process, FinCEN, working with delegated Internal Revenue Service (IRS) examiners, has recommended virtual currency providers and exchangers take certain actions to improve their compliance activities.”
In other words, Bitcoin exchanges and providers should move quickly to comply – or else, risk being investigated and penalized. As Mandelker cautioned, “The effectiveness of this structure depends on compliance by the regulated entities, and so we aggressively pursue virtual currency exchangers and others who do not take these obligations seriously. In July 2017, for example, FinCEN assessed a $110 million fine against BTC-e, an Internet-based, foreign-located money transmitter that exchanges fiat currency as well as the convertible virtual currencies Bitcoin, Litecoin, Namecoin, Novacoin, Peercoin, Ethereum, and Dash. At the time of our action,” Mandelker continued, “it was one of the largest virtual currency exchanges by volume in the world and facilitated transactions involving ransomware, computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.”
The new regulations are targeted primarily at virtual currency exchanges, such as Coinbase, rather than individual users. However, recent history teaches us that crackdowns on institutions often lead to investigations of individual taxpayers: simply look to the recent example of the Department of Justice’s Swiss Bank Program, in which banks were required to not only disclose “detailed information on an account-by-account basis” for accounts held by U.S. taxpayers, but also to “close accounts of accountholders who fail to come into compliance with U.S. reporting obligations.” Taxpayers should also keep in mind that the IRS, with court approval, has already begun the process of probing into roughly 14,000 user accounts associated with Coinbase – and, with the government’s increasing emphasis on the potential role of virtual currency in money laundering schemes and terrorist organizations, it seems likely that other cryptocurrency exchanges, such as Bitfinex, Bitstamp, and Kraken, will undergo similar examinations.
The takeaway message is that the IRS is increasingly prioritizing cryptocurrency tax compliance, which means IRS agents are putting a greater emphasis on identifying – and penalizing – Bitcoin users, sellers, traders, and miners who fail to report income, capital gains, and/or foreign financial accounts. If you have sold Bitcoin, purchased Bitcoin, accumulated Bitcoin savings, stored Bitcoin in accounts maintained overseas, or used Bitcoin to pay employees, it is critical to ensure compliance by consulting with a knowledgeable cryptocurrency tax attorney familiar with this new and evolving area of tax law.
To arrange a reduced-rate consultation concerning a virtual currency compliance issue, a question about reporting virtual currency, or a question about reporting a foreign account, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295 for assistance from an experienced tax attorney. Serving California and beyond, we handle Bank Secrecy Act and FBAR compliance, FATCA compliance, tax return preparation, and other Bitcoin and cryptocurrency tax issues.
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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