Do you
Bitcoin?
The issue
actually involves all cryptocurrencies, which would include Ethereum, Dash and
so forth.
A couple of
years ago the IRS won a case against Coinbase, one of the largest Bitcoin
exchanges. The IRS wasn’t going after Coinbase per se; rather, the IRS wanted
something Coinbase had: information. The IRS won, although Coinbase also scored
a small victory.
· The IRS got names, addresses, social security numbers, birthdates, and account activity.
· Coinbase however provided this information only for customers with cryptocurrency sales totaling at least $20,000 for years 2013 to 2015.
What happens
next?
You got it:
the IRS started sending out letters late last month- approximately 10,000 of
them.
Why is the
IRS chasing this?
The IRS
considers cryptocurrencies to be property, not money. In general, when you sell
property at a gain, the IRS wants its cut. Sell it at a loss and the IRS
becomes more discerning. Is the property held for profit or gain or is it
personal? If profit or gain, the IRS will allow a loss. If personal, then tough
luck; the IRS will not allow the loss.
The IRS
believes there is unreported income here.
Yep,
probably is.
The tax
issue is easier to understand if you bought, held and then sold the crypto like
you would a stock or mutual fund. One buy, one sell. You made a profit or you
didn’t.
It gets more
complicated if you used the crypto as money. Say, for example, that you took
your car to a garage and paid with crypto. The following weekend you drove the
car to an out-of-town baseball game, paying for the tickets, hotel and dinner
with crypto. Is there a tax issue?
The tax
issue is that you have four possible tax events:
(1) The garage
(2) The tickets
(3) The hotel
(4) The dinner
I suspect
that are many who would be surprised that the IRS sees four possible triggers
there. After all, you used crypto as money ….
Yes, you
did, but the IRS says crypto is not money.
And it
raises another tax issue. Let’s use the tickets, hotel and dinner for our
example.
Let’s say
that you bought cryptos at several points in time. You used an older holding for
the tickets.
You had a
gain on that trade.
You used a newer
holding for the hotel and dinner.
You had losses
on those trades.
Can you
offset the gains and losses?
Remember:
the IRS always participates in your gains, but it participates in your losses
only if the transaction was for profit or gain and was not personal.
One could
argue that the hotel and dinner are about as personal as you can get.
What if you
get one of these letters?
I have two
answers, depending on how much money we are talking about.
· If we are talking normal-folk money, then
contact your tax preparer. There will probably be an amended return. I might
ask for penalty abatement on the grounds that this is a nascent area of tax
law, especially if we are talking about our tickets, hotel and dinner scenario.
· If crazy money, talk first to an
attorney. Not because you are expecting jail; no, because you want the most
robust confidentiality standard available. That standard is with an attorney. The
attorney will hire the tax preparer, thereby extending his/her confidentiality to
the preparer.
If the IRS
follows the same game plan as they did with overseas bank accounts, anticipate
that they are looking for strong cases involving big fish with millions of
dollars left unreported.
In other
words, tax fraud.
You and I
are not talking fraud. We are talking about paying Starbucks with crypto and
forgetting to include it on your tax return.
Just don’t
blow off the letter.
