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Beware the Backlash: The IRS CryptoCurrency Crackdown Has Begun

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Beware the Backlash: The IRS CryptoCurrency Crackdown Has Begun

Bitcoin is celebrating its 10 year anniversary, and the market capitalization for cryptocurrencies worldwide grew by over 4000% last year to a total market capitalization of over $200bn.  And the IRS has taken notice in a big way.  In advance of a wave of crackdowns on non-reporting of cryptocurrency income and gains, the IRS has assembled a cryptocurrency regulatory dream team and armed them with tracking software called Chainalysis to trace cryptocurrency transactions and root out tax avoiders.  In 2016, the IRS ramped up its investigative efforts and sent a John Doe Summons to Coinbase, requiring disclosure of 14,000 users.  The IRS knew there was a significant tax gap forming when only 802 people reported gains/losses from Bitcoin in 2015 electronic filings despite the increasing popularity of these investments.

The growing fight for taxpayer information by the IRS, enforced by way of summons, and the premium the organizers of these “non-standard investments” place on the secrecy of their clientele follow a similar pattern to the FBAR reporting regime.  Many commentators see the IRS implementing an amnesty regime characterized by stiff fines and penalties for those caught willfully evading tax, but using some limited tax amnesty similar to the OVDP program to bring in revenues and engender greater compliance.

In United States vs. Coinbase, 3:17-cv-01431-JSC, U.S. Magistrate Judge Jaqueline Scott Corley, U.S.M.J. ordered Coinbase to comply with the John Doe summons.  You can read the Order here.  In a lengthy oral argument (available here), Judge Corley noted that there are billions of dollars of bitcoin transactions and very few taxpayers declaring gains, which gives rise to the IRS’s legitimate purpose of rooting out underreporting and going after the offenders civilly and criminally. (Pg. 7).  Coinbase’s attorney, Mr. Fondo, argued against the over-reaching nature of the intrusion, to which Judge Corley responded that she felt the narrowing of the IRS inquiry to taxpayers with over $20,000 of transactions represented the least restrictive means by which to undertake this kind of dragnet. (Pg. 7).  Mr. Fondo went on to argue that prospective regulations similar to the 1099-B reporting for brokerage account administrators could be implemented by Congress and would be more than sufficient without this intrusive backward reaching summons, to catch existing violators. (Pg. 8).  Judge Corley continued to view the John Doe summons as a legitimate “investigative tool” to carry out the IRS’s enforcement authority given that the IRS had a reasonable basis for suspecting tax noncompliance and rendered judgment in favor of the IRS. (Pg. 10, 18).

On February 23, 2018, Coinbase recently notified the 14,000 users whose account information it turned over to the IRS that their 2013-2015 transactions, account/wallet/vault, EINs, address, birthdate, and other Coinbase statements had been disclosed.  Anyone who received one of these notices should be meeting with a competent Tax Attorney the first chance they get.  To date, the IRS dragnet has been limited to customers who traded more than $20,000 of cryptocurrency in a single tax year, but broader enforcement actions are planned in the near future.


If you have questions about coming into compliance with reporting Cryptocurrency income or Cryptocurrency Tax Reporting exposure or your treatment under the new Tax Cut & Jobs Act, give us a call at (201) 529-8024 or e-mail me at [email protected]

Category: Tax

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