Independent confirmation of media reports has exposed a hard truth for the cryptocurrency investment community: coin traders owe the IRS big. Some coin traders were riding high last year, making fortunes on the bull crypto market. However, it’s time to pay the piper.
IRS Pursues Coinbase Customers
In late November of last year, Coinbase was ordered to hand over information on thousands of user accounts. Pursuant to the order, the largest Bitcoin exchange in the United States supplied the name, birthday, address, and taxpayer ID of 14,000 user accounts to the IRS. These customers were selected as the highest-volume traders between 2013 and 2015. Why is the IRS interested in this information? Because it has substantial evidence that cryptocurrency investors have been making capital gains on their virtual currency trades and not properly reporting them on their tax returns.
The Coinbase account holders reported to the IRS can expect an audit just about any day now. If so, they will be facing fees and penalties for failing to properly report their cryptocurrency income in the first place. At the end of it all, most of them will be wishing they had just paid their taxes properly in the first place.
Evading or under-reporting your tax liability can cost you big in the long run. If you make taxable income from cryptocurrency trades and you don’t include it on your tax return, you can get hit with substantial fees and penalties. Of course, you will have to pay taxes on the income you failed to report, as well as any additional taxes if the discovered income bumps you into the next tax bracket or affects your deductions. However, the IRS may also impose an inaccuracy-penalty of up to 20 percent, and you may be charged with a 5 percent monthly late fee on the amount you owe on top of everything else. In the most serious cases, the IRS can revoke your passport or even file charges against you in federal court.
Only 14,000 Coinbase user accounts are impacted by the recent lawsuit – so far. The IRS initially requested information on all Coinbase customers, and Coinbase was able to limit the scope of the order to only a fraction of its active users. However, the initial IRS demand foreshadows greater enforcement across the board. The 14,000 Coinbase users now known to the IRS are the big fish – those who had Bitcoin investments valued at $20,000 or more at any time between 2013 and 2015. However, after this early win in enforcing tax laws against cryptocurrency investors, the IRS shows no sign of slowing down.
As required by the tax code, Coinbase issued 1099-K forms to all qualifying customers earlier this month. If you performed at least 200 trades that totaled $20,000 in transactions or more through a GDAX or Coinbase business account, you should have received one. The fact that exchanges are taking reporting requirements seriously should give a hint to the rest of the crypto community – the IRS is cracking down on cryptocurrency taxes.
All trades reported on Coinbase 1099-K forms have been disclosed to the IRS. As a result, any inconsistencies in the exchange report and your tax return will more than likely put you on the short list for an audit. Coinbase has a basic tax reporting tool available to its users in beta, but it only provides a rough estimate based on basic accounting methods. To be sure you’ve calculated your cryptocurrency gains and losses properly, be sure to consult with a tax professional before submitting your figures to the IRS.
Most exchanges – including Coinbase - allow you to export your trade history. If you take a look, you may be surprised to see just how many taxable transactions you performed last year. Every sale, exchange, or purchase made with virtual currencies is a taxable event that must be reported to the IRS. For high-volume coin traders, this may mean hundreds – if not thousands – of transactions they need to report on their tax returns this year.
As they prepare for tax season, some coin traders are surprised to discover the extent of the IRS’s reporting requirements. Cryptocurrency investors must disclose each coin-to-coin exchange, coin-to-currency sales, and all purchases of goods or services they may have made in digital currency. The sheer volume of this data is so great; most popular tax preparation software can’t even handle it. For example, TurboTax Online only allows you to report up to 500 transactions per account, and the company warns that online performance is likely to go down as more information is uploaded. The desktop edition can handle more – up to 2000 trades – but for some of the most active cryptocurrency traders, this just doesn’t cut it.
The IRS is coming after the cryptocurrency community, and not consulting with a tax professional this year would be a big mistake. Not only are reporting requirements particularly tough for cryptocurrency investors, the IRS imposes additional requirements on money transacted through foreign exchanges and income from hard forks. This is a though tax environment, and cryptocurrency investors need good tax advice now more than ever.
A skilled cryptocurrency accountant can make sure you’ve properly reported your cryptocurrency investments, but that you are also making the most out of available tax credits and deductions.
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