Bitcoin and Virtual Currencies
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IRS Focus on Bitcoin and Virtual Currencies

4/4/2018 | By: Asher Rubinstein, Esq.| GDB 2018 Spring Newsletter
An IRS offensive against virtual currency non-reporting is similar to the way the IRS has pursued foreign banks to uncover “secret” offshore accounts that had not been properly reported.

The IRS considers virtual currencies to be “property” subject to income tax, rather than currency like dollars. Thus, if you sell Bitcoin or any other virtual currency for a profit, that profit is income and is subject to capital gains tax. You must report the income on your tax return, specifically on IRS Form 8949, which is then attached to Schedule D of Form 1040.

If you exchange any virtual currency for goods or services, that too is a taxable event. For example, if you use Bitcoin to purchase a product on Amazon, the purchase is not considered the same as buying the product for cash. Instead, the IRS considers you to have “sold” the Bit­coin in exchange for the product, and you have earned taxable income equal to the price of the product minus your cost basis in the Bitcoin (i.e., what you paid for the Bitcoin used to purchase the product).

As an indication of the seriousness of the IRS focus on tax compliance for virtual currencies, the IRS recently served Coin­base, the largest public virtual currency exchange, with a summons seeking infor­mation on Coinbase customers who may not have properly reported profits to the IRS. Last November, a federal district court ordered Coinbase to hand over much of the information requested.

On February 23, 2018, Coinbase notified about 13,000 users that it expects to disclose the information covered by the court’s order within 21 days. Coinbase will reveal client information to the IRS, includ­ing client names, taxpayer identification numbers and Coinbase virtual currency transactions. It is expected that the IRS will utilize this information to begin audits.

Please contact us regarding tax compli­ance issues for Bitcoin or any other assets — offshore, onshore, or virtual.