The Bitcoin Tax Evasion Crackdown
Cryptocurrency has come a long way. Its’ humble beginnings only go back to the late 2000s. When Bitcoin was first launched, individual Bitcoins were literally trading for just a few pennies. Now, after many ups and downs, Bitcoin has exploded in value. It currently trades at roughly $10,000 per unit. At its peak, it even traded at nearly $20,000! But that explosion of value ame with a price. It caught the attention of the Internal Revenue Service. As a result, the Bitcoin tax evasion crackdown has begun.
IRS Focus on Bitcoin Tax Evasion Started Late
Given crypto’s novelty and founding principles, it’s no surprise the IRS was slow to act. It wasn’t until 2014, for instance, that the IRS first released a statement classifying virtual currency as personal property. But, despite the lag, the IRS has continued to examine cryptocurrency. While doing so, it also gradually increased its virtual currency tax collection efforts. As we know, the IRS recently sent letters to cryptocurrency holders. They make it clear that the IRS is taking tax enforcement of virtual currency transactions very seriously.
Increasing IRS Collection Efforts
In this post, we focus on how the IRS is continuing to make collection of cryptocurrency tax liabilities a major priority. The letters recently sent out certainly make this clear. Those who received the “harsh” version of the letter, i.e., Letter 6173, should immediately contact a tax lawyer. They’re the ones most at risk of a Bitcoin tax evasion charge. Those who receive one of the lighter versions should file amended returns for past tax years, and possibly contact a tax lawyer, depending on the severity of their case. Cryptocurrency account holders may also want to utilize the current voluntary disclosure program.
IRS is Now Making Virtual Currency Tax Collection a Priority
As the IRS stated in IR-2019-132, more than 10,000 people in the U.S. are receiving letters regarding their virtual currency tax liabilities. These letters went to nearly every type of virtual currency holder. Some recipients are the very sophisticated virtual currency investors; those with significant gains stretching back to the beginnings of Bitcoin. Others are those who merely dabbled in bitcoin, or other cryptocurrencies (such as Ethereum), as a hobby or through curiosity.
The Significance of the Coinbase Case
What’s more, in 2017, the IRS prevailed in a case against Coinbase. Coinbase is one of the most prominent commercial cryptocurrency exchanges. The issue in the case was whether the IRS could compel Coinbase to transfer information to it regarding its customers. Specifically, the IRS sought information regarding taxpayers who bought or sold at least $20,000 of virtual currency in a single year.
The case is significant because the identity of cryptocurrency holders can be very difficult to pin down (which is part of cryptocurrency’s allure). And because the IRS needs to know a person’s identity in order to initiate an audit, the case marks a watershed in the taxation of virtual currency transactions. It literally marks the point at which the IRS was enabled to crack down on Bitcoin tax evasion.
IRS Letter 6173 Recipients Should Contact a Tax Lawyer
The IRS sent three types of letters to Bitcoin and other virtual currency holders. Among them, Letter 6173 is the “harsh” version. This letter requires a taxpayer response. Responding is not a choice. If you receive this Letter 6173, you should contact a tax attorney right away. A tax attorney can provide proper counsel regarding how to respond and, unlike a CPA, offers the added benefit of attorney – client confidentiality. Depending on the circumstances, a taxpayer may need to utilize the voluntary disclosure program. Or, he or she may simply need to file amended tax returns for previous years which omitted cryptocurrency gains.
No Specific Voluntary Disclosure Program
It’s important to know, that the IRS currently doesn’t offer a voluntary disclosure program specifically for offshore or domestic virtual currency holders. The IRS has indicated, through its spokespeople, that it doesn’t intend to create a separate program specifically for virtual currency in the near future. But, cryptocurrency holders can still attempt to take advantage of the benefits provided by the disclosure program if they have unreported offshore (or domestic) cryptocurrency gains.
Hiding is Not an Option
Bitcoin and other cryptocurrencies have had quite an impressive journey. Bitcoin has literally gone from being valued at pennies to being worth roughly five figures per coin. Many, many people have profited greatly from this burgeoning industry. In the industry’s early years, lots of people were making impressive gains and relatively few were reporting those gains. While this isn’t too surprising, it’s also something that is coming back and being put in the foreground. Bitcoin and cryptocurrency holders who have gains should not expect to simply hide away from the IRS.
Contact MC&C Today for Immediate Virtual Currency Assistance
The IRS has made it clear that virtual currency gains are taxable. Moreover, it will take aggressive measures to collect delinquent liabilities. At Mackay, Caswell & Callahan, P.C., we’re staying on top of cutting-edge developments in IRS tax debt collection. We expect the IRS to become more and more aggressive. That includes its efforts to crack down on Bitcoin tax evasion. We will continue to feature IRS notices, statements, guidelines and other important documents on cryptocurrency taxation. If you have any questions on this novel topic, don’t hesitate to call us. Lots of people are scratching their heads regarding it. Call us and one of our top New York City tax attorneys will answer your query in double quick time!
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