Crypto-currency and Taxes: The IRS Strikes Back

Photo of author

(— February 26, 2018) — If crypto-traders believed they can exchange cryptocurrencies without paying taxes, they were being naive.

 It was just a matter of time when the IRS would come down on those who thought they were trading “below the radar.” US tax officials have requested personal data on more than 12.000 users of bitcoin and ethereum crypto-currencies and they are now probing the exchange.

The request is a part of an ongoing tax evasion probe of Coinbase which operates as a digital wallet and crypto-currency exchange platform.

According to the letter that Coinbase sent to its users, the court ordered the provider to disclose “taxpayer ID, name, birth date, address, and historical transaction records for certain higher-transacting customers during the 2013-2015 period.”

Tax laws apparently do apply to crypto-currency users. The IRS has released guidelines for how to pay taxes when exchanging crypto-currencies. According to the IRS instructions crypto-users are mandatory to report their earnings and to pay taxes, in US dollars of course.

“We remind all our customers, that you have a responsibility to self-report and pay taxes on all taxable gains. Please consult with your accountant or tax advisor to ensure that you file and pay taxes correctly,” the statement on the Coinbase webpage reads.

Coinbase customers, however, have nothing to worry about, according to the Fortune which cites the crypto-currency lawyer at Cooley LLP Marco Santori.

According to Santori, Coinbase has no legal obligation to comply and has rejected the request of the IRS.

“This is a blanket request—it’s an opening offer [by the IRS]. They have to come in with something crazy, then agree to limit it to something reasonable,” Santori said, adding that the scope of the IRS probe would be quite modest.

“We are aware of, and expected, the Court’s ex parte order today,” Coinbase said in a statement, adding that it would protect the “U.S. customers’ legitimate privacy rights in the face of the government’s sweeping request.”

One of the major implications of the IRS Notice 2014-21 is that the U.S. government has decided to treat cryptocurrencies like bitcoin as property instead of currency. Since crypto-currency is technically a property and not a currency, the eventual loss is no more than $3.000 per year, according a bitcoin authority Ryan Selkis.