There's probably no trendier investment than bitcoin and other virtual currencies.

Along with their unbelievable appreciation in value, however, there's also a dangerously mistaken belief on some investors' part that virtual currencies are beyond the reach of the tax agencies.

Now, the IRS is launching an aggressive enforcement campaign that will likely make examples out of Americans who fail to pay taxes on bitcoin transactions--a giant group, apparently, in the agency's eyes.

Among the most high-profile steps: the IRS spent a year fighting in federal court to force Coinbase, "a San Francisco-based digital-currency wallet and platform with about 20 million customers," to turn over customer data.

Today, according to the Wall Street Journal, Coinbase is slated to turn over information on roughly 13,000 of its customers who traded more than $20,000 in digital currencies between 2013 and 2015.

"The data include the customer's name, taxpayer identification number, birth date and address, plus account statements and the names of counterparties," the Journal reports. "Criminal tax lawyers expect the IRS will act on the information and high-profile cases will follow."

Before we go further, I'd like to make sure three points stand out:

1. Bitcoin transactions are apparently wildly taxable--far more so than investors may think. Although the IRS hasn't issued much formal guidance, it's apparently taking the position that any transaction involving virtual currency can trigger a taxable event.

As the Journal puts it, using cryptocurrency "to buy something like a meal or a car also counts as a sale by the buyer."

2. Today's scheduled delivery of information to the IRS included just 13,000 people, but the original IRS summons was for information on every single Coinbase customer--roughly 500,000 people.

So, just because the IRS was able to get only part of that information so far, there's no reason to think they'll just give up on everyone else. 

3. Note the years: between 2013 and 2015. As often happens, the IRS is only now able to target people based on things they did several years ago.

That means if you had bitcoin transactions last year, you might expect the IRS to still be digging through the data in the year 2020 or later. And the IRS has a really good track record on this kind of enforcement. Just look at the 56,000 Americans who wound up paying $11 billion in back taxes after the IRS was finally able to pierce the veil on Swiss bank accounts in 2009.

So, what do you do if you're concerned you might be among the group the IRS is now targeting--people who may have had crypto transactions, but didn't report them, even if it was just an innocent misunderstanding of the law?

This morning, I interviewed two experienced tax lawyers from the law firm of Holtz, Slavett and Drabkin, APLC in Beverly Hills, California, to get an answer.

"The IRS is definitely increasing its efforts to gather information about bitcoin and other cryptocurrency transactions," partner Igor Drabkin told me. "Those who fail to [report gains] may not only have tax liabilities, but also face significant penalties or, in egregious situations, criminal prosecution."

So, bottom line, if you think you might be even remotely at risk, it's almost certainly worth the fee to talk with a tax lawyer and figure out your strategy. 

"It is always good to come forward voluntarily before the IRS comes knocking on your door," said Gary Slavett, who is also a partner at the firm.

Published on: Mar 16, 2018
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