For taxpayers holding significant investments and offshore accounts, it is no secret that the IRS and U.S. government have used significant resources towards identifying and prosecuting those who commit tax evasion and other tax crimes. Starting around 2008, federal prosecutors began enforcing the longstanding obligation to file FBAR (Report of Foreign Bank Accounts). In 2010, FATCA (Foreign Account Tax Compliance Act) was passed by Congress. In the years following, the U.S. government signed agreements with more than 100 nations that currently allow or will allow for the sharing of tax and financial account information.
Perhaps sensing that much of the “low-hanging fruit” has been identified in the offshore tax area, the IRS is now looking to crack down on taxpayers who use Bitcoin and other forms of digital currency to commit tax evasion and other crimes. In fact, earlier this year TIGTA indicated that the IRS had failed to develop a coordinated plan or approach to a number of digital currency tax issues. However, it appears that this brief moment of intra-agency paralysis has passed. Taxpayers holding bitcoin who have failed to report and pay taxes should immediately take steps to address this issue and stave off audits or other tax enforcement actions before they are launched. For tax concerns regarding Bitcoin or Coinbase, or any offshore assets, contact a Roseville tax lawyer of NewPoint Law Group, LLP toget your finances in order.
IRS Files “John Doe” Summons with Popular Bitcoin Exchange “Coinbase”
One way users of Bitcoin can interface with the technology and conduct transactions is by signing up with online platforms. While different platforms offer different services, many of the most popular are all-in-one, meaning that a single website is how you:
- Buy digital currency,
- Sell digital currency,
- Hold digital currency, and
- Use Bitcoin or other digital currency to buy or sell goods.
Essentially, websites like Coinbase.com serve as a one-stop location to see one’s Bitcoin “wallet” and engage in an array of transactions and actions.
While these sites are certainly convenient, they also represent a hole in the Bitcoin security model. That is, users of these sites freely provide their e-mail address and other identifying details. Since all transactions conducted in Bitcoin become part of the public ledger (blockchain), the information provided to Coinbase can theoretically be used to link an individual to their Bitcoin holdings and transactions. This is of course simplified, but it is essential to note that once a user divulges their Bitcoin identity to a third-party, that third-party becomes a leverage point for the IRS to use in discovering your identity. In fact, this is exactly the tactic that the IRS has adopted.
The IRS recently petitioned a California court to permit the agency to serve Coinbase, a San Francisco-based Bitcoin exchange, with John Doe summons. The summons would require the company to turn over the identity of covered account holders. On November 30, 2016, an Order granting this request was entered by the court allowing “Senior Revenue Agent David Utzke or any other authorized officer or agent, [to] serve an Internal Revenue Service John Doe summons upon Coinbase, Inc.” While Coinbase is expected to fight the summons, it is highly likely that it will be compelled to turn over Bitcoin account data from 2013, 2014, and 2015.
What Tax Issues Can Bitcoin Create?
If you have been paid in Bitcoin or paid employees in Bitcoin, employment taxes should have been accounted for, held, and turned over to the U.S. government at the appropriate time. Furthermore, any wages or salary paid in Bitcoin is also subject to Bitcoin. Finally, if a person “mined” for Bitcoin and was award a full or partial Bitcoin for his or her efforts, income tax would also be due on this compensation.
Aside from payroll and income tax considerations, one must also account for capital gains taxes because the IRS treats digital currency as property. Thus, when one holds or trades Bitcoin, it is essential to note the value of full or partial Bitcoin in U.S. dollars. When you sell or otherwise transfer the full or partial Bitcoin, one must also make a record of the value of the Bitcoin. Capital gains tax is realized at the time of the second transfer and must be accounted for by the taxpayer. A failure to account for any of these or other tax obligations relating to Bitcoin can result in a tax audit, criminal tax evasion charges, and other tax consequences.
Bitcoin Tax Concerns? Work with a Roseville Tax Lawyer
If you are worried about Bitcoin transactions and whether you may have made serious tax errors, the lawyers of NewPoint Law Group, LLP may be able to help. We can assess your Bitcoin transactions and holdings so that we may determine whether you should file amended tax returns or engage in other steps before the IRS takes action. Those who correct their noncompliance voluntarily will typically achieve significantly more favorable outcomes than taxpayers who do not come clean.
If you would like to discuss your tax concerns with a tax attorney serving Sacramento, Folsom, and Roseville, call the Roseville IRS tax audit lawyers of New Point Law Group today. You can schedule a confidential consultation by calling 800-358-0305 or contacting us online.