Post by conflict on Jun 17, 2017 6:45:14 GMT 4
The IRS has taken an interest in Bitcoin for various reasons.
First, Bitcoin is largely unmonitored and stands apart from the
traditional structure of U.S. banking with 1099 forms and regular
reporting. There is a huge mass of Bitcoin value that is relatively
unknown to the IRS, and gains in value are essentially hidden from
the IRS, and the IRS doesn't like that. In addition, Bitcoin
has a large potential for tax non-compliance, both because its very
nature is anonymous, and because Bitcoin holdings give rise to
significant IRS reporting (the "FBAR" form, IRS Form 8938, IRS Form
8949, capital gains taxes, etc.) and many Bitcoin owners
don't heed (or even know) the reporting requirements.
In November 2016, the IRS obtained a federal court authorization
to issue a "John Doe" summons to Coinbase,
Inc., a web-based global digital currency wallet and platform.
The IRS has in the past successfully used the "John Doe"
summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of
U.S. taxpayers who are not individually named but whom the IRS has
reason to believe may have utilized the financial institution to
improperly evade tax. The John Doe summons upon Coinbase seeks
records from 2013 through 2015 for any Coinbase user with a US
address, telephone number, e-mail domain, etc., and all records
related to disbursement of funds to any user. A recently filed
Affidavit by an IRS agent in the Coinbase enforcement litigation
revealed that in 2015, only 802 taxpayers revealed Bitcoin
information to the IRS on Form
8949, which is the form applicable to capital gains and losses.
Other virtual currency platforms, such as Localbitcoins, Kraken and
ItBit may receive similar summonses for transactions with Bitcoins
and other virtual currencies like Ethereum and Litecoin.
Bitcoin's anonymity feeds its non-compliance, and there are
many opportunities to run afoul of tax law and IRS requirements,
intentionally or inadvertently. One issue is the failure to report
income with respect to Bitcoin. In 2014, the IRS issued Notice 2014-21 describing how various income
recognition and other US tax principles apply to virtual currency
transactions. In that Notice, the IRS clarified that virtual
currencies are "property" subject to income tax, capital
gains tax, etc. This means that if Bitcoin is sold for a profit,
that profit is income and is subject to capital gains tax. The
income is reportable on IRS Form
8949 which is then attached to Schedule D of Form 1040. If you
exchange your Bitcoin for goods or services, that too is a taxable
event, as the IRS considers you to have earned income on the value
of the good or service, less your cost basis in the Bitcoin (i.e.,
your Bitcoin purchase price).
If you are audited by the IRS regarding Bitcoin, you may have to
show multiple cost bases for multiple transactions. Proper record
keeping with respect to Bitcoin is essential. The IRS could take
the position that your cost basis in your Bitcoin is zero, and you
would pay tax on the full value of the Bitcoin on the date of the
transaction, unless you can provide records of your purchases of
Bitcoin.
In addition to income tax issues on Bitcoin income, there are
reporting issues irrespective of income. Because a Bitcoin wallet
would be considered by the IRS to constitute an
"account", if you hold your Bitcoins in foreign wallets
or on foreign Bitcoin exchanges, then foreign account reporting
requirements are triggered, including the FBAR (FinCEN Form 114, Report of Foreign Bank and
Financial Accounts) and IRS Form 8938 (Statement of Specified Foreign
Financial Assets). If you invested in a foreign fund that
invested in Bitcoin, the IRS may consider the fund to be a "PFIC" (Passive Foreign Investment
Company), which has its own tax methodology, and IRS Form 8621 would be due. Penalties for
non-reporting foreign accounts are significant, including
potentially 50% of the value of the account.
Clearly, the IRS' increased interest in Bitcoin necessitates
proper compliance with respect to Bitcoin assets. The IRS offers
opportunities to come into compliance before the IRS obtains
information about unreported assets (virtual or actual) and income,
including via a pre-emptive voluntary disclosure (offshore or
domestic) of digital currency income and accounts. A voluntary
disclosure also provides the opportunity to calculate, with a
reasonable degree of certainty, the total cost of resolving open
tax issues, along with peace of mind and finality.