Crytocurrency is all the rage these days, but it could also be a new target for the Internal Revenue Service (IRS). Last week Coinbase, one of the largest cryptocurrency exchanges in the world, was ordered to hand over customer records from the years 2013-2015. The IRS requested customer records from Coinbase in 2016 due to suspicions that customers were trading in digital currency and weren’t reporting their gains to the government.
Nearly one year after the case was filed, a California federal court ordered Coinbase to turn over some of its user accounts. So what does this mean for cryptocurrency owners? It is evident that the IRS has their eye on cryptocurrency transactions in an attempt to eliminate tax evasion. Recent reports indicate that they’ve ordered training for their agents and earlier this year they announced an agreement with Chainalysis for tracking.
If you are one of the thousands of people using cryptocurrency, here are 5 things to consider when it comes to the IRS and taxes:
- It’s property.
In 2014, the IRS issued guidance in Notice 2014-21 that classified cryptocurrency as property. That means every time you transfer it, you might trigger gain or loss which means taxes.
- Bartering is taxable.
A barter exchange is considered taxable income to the IRS. Regardless of the swap, according to the IRS, it’s income to both sides.
- Exceptions may not apply.
1031 exchanges are exceptions that allow taxpayers to defer any gain until such property is exchanged for property, but guidance from the IRS is unclear whether this applies to swaps of cryptocurrency.
- You can get caught.
Following the recent case against Coinbase, the IRS is hunting digital currency users. They are using Chainalysis software to identify owners of digital wallets with unreported income. They can request customer records from digital currency exchanges.
- Size doesn’t matter.
All transactions are created equal in the eyes of the IRS, there’s no deal too small to attract their attention. A pending bipartisan bill, “The CryptoCurrency Tax Fairness Act”, would make transactions less than $600 exempt, but it hasn’t passed yet.
As a leading managed service provider with numerous clients in finance and accounting, we are staying updated on the developments of cryptocurrency as they continue to unfold. Is there an emerging technology in your industry you’re wondering about? Drop us a line and we’ll share our thoughts on how it can affect your industry. If you have any questions, don’t hesitate to ask CompassMSP.