Think the IRS doesn’t know about your bitcoin? – Think again

Online Taxman staffCrypto tax

coinbase bitcoin users tax IRScrypto IRS

coinbase bitcoin users crypto gains IRSJust because the tax code makes no mention of crypto currencies, or other modern technology based business like e-commerce for that matter, it doesn’t mean that the IRS doesn’t want in on the action.

Coinbase ordered to hand over user data to the IRS

Coinbase, the popular platform for buying, selling, transferring and storing digital currencies like Bitcoin, Ethereum or Litecoin, just received orders from the IRS to disclose the identity of traders with more than $20,000 in annual transactions in 2013-2015. This order affects over 14,000 users, which is only a small percentage of Coinbase’s 10M+ customers. Nevertheless, it is a substantial win for the IRS and will likely be just the beginning.

The government’s initial request for user data included information on all Coinbase users who made transactions from 2013 to 2015. A court narrowed down the request to those who have bought, sold, sent or received at least $20,000 worth.

Bitcoin and the IRS

The IRS’ quest for finding bitcoin users should come as no surprise. In each of the tax years 2013 to 2015 only 800-900 people declared bitcoin gains in their tax returns. Given that Bitcoin saw over 30 million transactions in 2013 alone, a number that more than tripled by 2015, the disconnect is obvious.

Many crypto traders may simply not know that almost any digital currency transaction is potentially a taxable event for US tax purposes. The IRS however suspects, maybe rightly so, that some use the privacy of digital exchanges to hide gains from taxation.

Impact on crypto users

If you are affected by the IRS order, Coinbase will hand over your info, such as:

  • taxpayer ID number
  • name
  • birth date
  • address
  • any records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction
  • all periodic statements of account or invoices (or the equivalent).

You may face back taxes, interest, failure to pay and/or substantial under payment penalties, and even criminal charges if the IRS thinks you acted intentionally to conceal your gains.

Catching up on unreported crypto gains

Even if you are not affected by this disclosure, be aware that the IRS is actively pursuing tools to uncover unreported bitcoin transactions.

Now is the time to come clean on your crypto gains. The IRS is generally more forgiving to people who come forward voluntarily. If you wait until the IRS catches you, the penalties will almost certainly be stiffer and you will be less likely to get certain penalties waived.  If you’ve had crypto gains over the past few years, we highly recommend consulting your CPA immediately to explore your options. Generally this will entail amending your past tax returns to show the capital gains that you have earned.


Photo by Pana Vasquez