Foreign Nationals & Expats
Houston Tax Attorney
IRS Evaluates Crytocurrency Taxable Events
At a recent conference, the IRS opened up about its cryptocurrency compliance efforts.
To combat tax evasion from those engaged in cryto trading, the IRS has created cyber units, called CCUs. The hub is in Los Angeles, and agents are posted in Las Vegas, Denver, Seattle, Phoenix, and Dallas.
IRS is using data analytics to identify whether a crypto transaction is taxable.
Virtual currencies had estimated values of $25 million in 2017 with less than 1,000 taxpayers reporting their transactions.
Darren John Guilliot, director of IRS’ field collection operations noted that they’ve begun enforcement efforts from the data received through the Coinbase summons:
“Two months ago, I got access to all of the Coinbase summons information, and I shared all of the names of the 11,000 people on that list who have cryptocurrency with my revenue officers coast to coast…And they have spent the past two months matching the entire assigned work and stuff in the queue that isn’t assigned yet.”
On the criminal tax side, the IRS added that CI has started communicating with the DOJ on how to put together a case for prosecution.
Cryptocurrency Tax Compliance
The IRS treats virtual currency as property (i.e., assets). General tax principles applicable to property transactions apply to purchase and sale of virtual currencies.
As an asset, the taxable income from the sale of a cryptocurrency unit is determined by subtracting the sales price minus the basis.
If purchased, the basis is the cost at with the units were purchased. If received as payment for goods or services, the basis is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.
If mined, then when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
The character of the gain or loss depends on whether the virtual currency is a capital asset in the hands of the taxpayer. For most individuals, it will be a capital asset. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. Cryptocurrency dealers would therefore report ordinary gain or loss.
Cryoptocurrency transactions can be challenging, especially where there are numerous purchase and sale transactions. Unlike with U.S. securities accounts, cryptocurrency exchanges do not track your gain and loss, and it falls upon the investor to calculate those.
From U.S. based exchanges, you’ll likely receive a 1099-K but that will include your total proceeds but will provide no information regarding cost basis.
It is also important to note that a coin-to-coin trade is considered a sale or disposition.
What should non-compliant taxpayers do?
Some taxpayers with crypto accounts were able to resolve their non-compliance via the now discontinued OVDP program, and the streamlined filing compliance procedures. Those that are willful may need to look into a traditional voluntary disclosure.
As to whether a streamlined filing compliance procedures are appropriate for crypto non-compliance, it may depend on the type of account and whether there is an FBAR filing requirement.
The IRS has not explicitly stated one way or the other as to whether an FBAR must be filed for cryptocurrency. If cryptocurrency is held in a personal wallet, then it’s possible that no FBAR is required to be filed. For those holding bitcoin through a foreign financial institution or foreign exchange, there may be an FBAR filing requirement
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