IRS Wants to Tax Early Adopters of Cryptocurrencies
The Internal Revenue Service is looking to tax early adopters of cryptocurrencies who profited from it.
Now the Internal Revenue Service (IRS) has set its sights on the early adopters of cryptocurrencies, particularly those who earned from the blockchain technology. The IRS is concerned that between 2013 and 2015, only 800 to 900 taxpayers have reported gains on cryptocurrency.
In a brief six-page memo entitled IRS Notice 2014-21, describes how existing general tax principles apply to transactions using virtual currency. But the brief raised more questions than answers.
The memo reads:
“In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in tax liability.”
IRS Wants Coinbase to Turn Over Cryptocurrency Users
The IRS took Coinbase to court to force the largest cryptocurrency exchange in the U.S. to hand over records of digital currency users to search for “possible tax evaders.”
U.S. Magistrate Judge Jacqueline Scott Corley issued a ruling on November 29, 2017, requiring Coinbaseto comply with an order to identify 14,355 cryptocurrency accounts, all of which performed transactions exceeding $20,000 between 2013 and 2015.
Corley wrote in her ruling:
“Moreover, Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains. The IRS has a legitimate interest in investigating these taxpayers.”
Both sides claim victory for the ruling, with Coinbase saying they don’t have to release all of its clients’ records. The exchange further stated that it intends to appeal the ruling.
The Taxman Wants More
And as if the IRS snooping around cryptocurrency traders who have already profited from the trade, Congress thinks it has not yet taxed the space enough.
President Donald Trump signed into law the Tax Cuts and Jobs Act on Dec. 22 that includes a provision that means additional taxes to cryptocurrency traders. Prior to the passage of the law, Bitcoin traders could exchange the digital currency for Bitcoin Cash or vice versa and such activity is not a taxable event because they were considered “like-kind exchanges.” Under the Tax Cuts and Jobs Act, such an event is now a taxable event.
Congress also introduced the proposed Cryptocurrency Tax Fairness Act in September which seeks to exempt Bitcoin transactions that are less than $600 from taxes. But the proposal did not gain any traction.
For now, the tax authorities have not gone after actual wallets, but simply cryptocurrency buyers. There is no information on how miners could account for their cryptocurrency holdings.