With tax season just a few months away, which means the season for creative forms of tax evasion is soon to begin.
Sadly, for those with dreams of using bitcoin to cheat the tax man next year, there is some bad news. The Internal Revenue Service is actively on the lookout for bitcoin-based for tax evasion.
According to documents filed last week, the tax agency is fiercely going after both tax evaders big and small – who are using bitcoin based transactions in an attempt to hide funds from the internal revenue service, by simple not reporting them. The tax agency sent a broad request on Thursday to Coinbase, the largest Bitcoin exchange in the United States, asking for the records of all customers who bought virtual currency from the company from 2013 to 2015.
That request came in the form of a "John Doe summons," – and indicated that the IRS had already discovered 3 cases of bitcoin based tax evasion, 2 of which came care of Coinbase customers.
Those findings combined with Bitcoin's rather anonymous user base have made the IRS decide the time has come to take a closer look, just to make sure that a whole lot of other people haven't gotten the idea that stashing money in a Coinbase account is not a good way to hide dollars from Uncle Sam. —
The crackdown follows a September report by the Treasury Department's inspector general focused on whether the IRS is taking an adequately aggressive stance on "unlawful activities by those who use virtual currencies."
"None of the I.R.S. operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies," the report, delivered in September, said.
If thy comply with the request, Coinbase will be required to hand over the identity and transaction history of it's 3 million customers. As of now Coinbase does not plan to comply.
" We can't tolerate sweeping fishing expeditions. We are very concerned about the financial privacy rights of our customers," said Coinbase's legal counsel, Juan Suarez, who said the business keeps a policy focused on working with law enforcement.
That said, bitcoin wallets are tracked through a decentralized hub, which does not record these identities.
There is also a further complication that smaller bitcoin tax "evaders" may not be evading anything – so much as confused about the actual law.
The current guidance indicates that virtual currency is property, rather than currency. That means if a person buys Bitcoin for $200 and then sells it later for $400, the $200 in gains are supposed to be reported to the tax authorities. However, since users often "cash in" bitcoin (and effectively sell it off into other currency) when they buy or sell goods – technically any transaction act also becomes a taxable vent.
"It may be the case that many people were not aware that what they were doing is taxable. Are those the people the I.R.S. is looking for?" noted Omri Marian, a professor of tax law at the University of California, Irvine.
Marian noted that most Bitcoin users could be totally unaware that they were supposed to record their losses and gains as taxable events at any time they bought or sold goods with bitcoin.