Watch Out Cryptocurrency Owners, The IRS Is On The Hunt - Forbes

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Watch Out Cryptocurrency Owners, The IRS Is On The Hunt - Forbes

Watch Out Cryptocurrency Owners, The IRS Is On The Hunt - Forbes

Posted: 31 Jul 2019 10:50 AM PDT

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The massive tax bust of crypto owners has begun with the IRS mailing 10,000 letters to crypto account owners. These letters educate crypto account holders about the rules and tell taxpayers to review their tax reporting for crypto transactions to be sure they reported income correctly. If necessary, taxpayers should file amended tax returns and or late returns. These tax returns should be marked with the corresponding letter type (i.e., Letter 6173, 6174 or 6174-A) and mailed to a particular IRS address. In other words, these tax filings won't be a needle in the haystack and the IRS will take a close look. Many audits may follow.

IRS Letter 6173

"We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies."

The IRS might know there is unreported income based on tax information obtained through enforcement actions, which include the summons against U.S. Coinbase customers. You received the letter because you didn't file a tax return, which should have included virtual currency transactions. Alternatively, you filed a return but did not report virtual currency transactions. You must reply to this tax notice by submitting a correct late tax return or an amended return. If you disagree with the IRS, the letter requires a full explanation with a signed statement declared under penalties of perjury.

Letter 6173 is a severe tax notice, and you should not don't dig yourself into a bigger hole with an incorrect reply. In some cases, perjury could be a felony. The letter states, "If we don't hear from you by the "respond by" date we may refer your tax account for examination."

I wonder how the IRS will conduct its audits of virtual currency transactions. They will need a list of all coin exchanges and private wallets and probably have to use trade accounting software in the same way a taxpayer would.

IRS Letter 6174

"We have information that you have or had one or more accounts containing virtual currency but may not know the requirements for reporting transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies. After reviewing the (educational) information below, if you believe you didn't accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn't file a return for one or more taxable years."

The key phrase is that the taxpayer "may not know" crypto tax treatment. It sounds like the IRS does not have sufficient information indicating unreported income. Letter 6174 is an "educational letter," and it states, "you do not need to respond to this letter." If you received this tax notice, then you should review your crypto tax reporting and consider filing an amended tax return, if appropriate. Consider the IRS advice a warning shot across your bow.

Letter 6174-A

"We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies. After reviewing the information below, if you believe you didn't accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn't file a return for one or more taxable years. You do not need to respond to this letter."

The critical phrase is "may not have properly reported." That's different from Letter 6173, which states "may not have met" your tax requirements. Letter 6174-A implies the taxpayer reported crypto transactions, but perhaps not in the proper way. For example, maybe the taxpayer used Schedule C (business income) instead of Form 8949 (capital gains). Perhaps they used like-kind exchanges, and the IRS might not allow that. Conversely, Letter 6173 indicates the taxpayer did not report crypto transactions at all.

The IRS has various types of tax information for virtual currency account owners, and it selected the letter that best matched their knowledge base. The IRS is also using third-party services to obtain more tax information. It's wise to come clean now if you know you have errors in reporting crypto transactions. Historically, taxpayers have performed better in seeking abatement of penalties if they come forward to the IRS before getting busted first.

Civil and criminal prosecution and FBAR reporting

The IRS stressed, "Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution." The IRS sent mob boss Al Capone to prison for tax evasion, which was less challenging than indicting him for unlawful bootlegging. Learn about accuracy-related penalties and what constitutes reasonable cause for reduction of penalties.

The IRS Virtual Currency Compliance campaign reminds me of IRS initiatives to hunt down hidden offshore bank and brokerage accounts. FATCA legislation forced foreign banks into reporting on U.S. resident accounts. The IRS Offshore Voluntary Disclosure Program (OVDP) helped taxpayers come clean with voluntary reporting. That led to reduced penalties, which otherwise were onerous. Some tax cheats used foreign bank accounts to conceal business income from the IRS. Others protected assets with offshore structures and only did not correctly report portfolio income.

In retrospect, it seems the IRS made a mistake in (unofficially) waiving foreign bank account report FinCEN 114 and Form 8938 for offshore virtual currency accounts. Virtual currency is "property," which did not meet the requirements for FinCEN 114 and Form 8938 (Statement of Specified Foreign Financial Assets). There are significant penalties for not filing FinCEN 114 (previously known as FBAR) on time with the U.S. Treasury. Once you put Treasury on notice of owning these accounts, it dissuades you from hiding income from the IRS on those same accounts.

Coin-to-coin exchanges

In the educational section of these IRS letters, it states that crypto-to-crypto trades (i.e., Bitcoin for Ether) are taxable capital gains. The letter does not mention Section 1031 or like-kind exchanges being allowed on pre-2018 trades. (The new tax law TCJA restricted like-kind exchanges to real property only, starting in 2018.) Many crypto traders did not report deferred capital gains on coin-to-coin trades. Some may have, but they omitted the required Form 8824.

I've questioned whether coin-to-coin trades qualify for like-kind exchange treatment in years before 2018. Different types of virtual currencies might not be eligible as like-kind property, and coin exchanges are not qualified intermediaries. Multi-party like-kind exchanges require both.

Tax information statements and trade accounting

The IRS letters say to report all transactions whether tax information statements (Form 1099) were sent, or not, for crypto accounts held in the U.S., or abroad. Cryptocurrencies are "property," not a "security," so it's not a "covered security" for purposes of 1099-B reporting. Coinbase, the largest U.S. crypto exchange, appeased the IRS during their fight for obtaining taxpayer information, by issuing a Form 1099-K for larger accounts. The IRS intended Form 1099-K for third-party network transactions for merchants; not traders or investors. Only U.S. exchanges might provide 1099-Ks. Coinbase also provided capital gain and loss reports for later years.

Taxpayers should consider using a trade accounting solution or software program to download virtual currency transactions from all coin exchanges and private wallets. Many crypto owners have accounts around the world, and accounting issues are more challenging when trading on margin. The IRS will likely use this same software in an exam.

Additional IRS guidance coming soon

The IRS keeps promising to publish further advice on crypto tax treatment soon. Why did they send 10,000 education letters if they plan to update their education guidance shortly? Perhaps, it would have been better to publish updated guidance before mailing them. This letter campaign seems a bit like a fishing expedition: The IRS wants more tax returns to analyze before it tackles tax treatment issues further.

Additional guidance is expected to address like-kind exchanges; chain splits, permissible accounting methods, wash sales, Section 475, and more. The AICPA issued a letter containing suggested questions and answers. The basics are clear, and the delay in additional guidance is no excuse for non-compliance.

IRS data analytics

The IRS said it would continue to use data analytics, and perhaps other blockchain technology to uncover more non-compliant crypto taxpayers. The IRS successfully used an independent company Chainalysis on recovering tax information from U.S. Coinbase customers. That may have been one of the sources for this first batch of 10,000 account letters.

What tax evaders didn't initially realize is that virtual currencies may not be an ideal medium of exchange for concealing income and assets from tax authorities. Unlike using cash (dollar bills), blockchain is a distributed ledger which is available to the public. Non-crypto virtual currency may have a private company centralized ledger, but the IRS might be able to get that through a summons, too. AI, blockchain tools, and crypto trade accounting programs will help the IRS bust crypto tax evaders and taxpayers who are honest but misinformed.

Takeaway

This IRS letter campaign is just the beginning of virtual currency enforcement activities to come. You should take this opportunity to get fully educated, review your reporting, and be sure you are tax compliant. Pay tax liabilities and interest expenses, and then seek abatement of penalties when assessed. Some crypto users might try to claim ignorance or argue they received terrible tax advice. Others might assert that the crypto tax rules were too vague and uncertain at the time of filing. Some tax treatment issues are unknown (i.e., like-kind exchanges and hard forks), but the basics are clear. After receiving these education letters, which are warning shots, there are no grounds for continued non-compliance.

Consult a crypto tax expert immediately after receiving any of the above IRS letters. The CPA can reply to Letter 6173 soon and request more time to file amended returns. The 2018 tax return deadlines are coming up on September 15, 2019, for entities, and October 15 for individuals. Plan to work with your CPA after those dates on amended tax return filings.

Breaking news and more resources

IRS IR-2019-132: IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency's larger efforts. 

WSJ quotes my partner in IRS Sending Warning Letters to More Than 10,000 Cryptocurrency Holders. "When it comes to preparing tax returns involving cryptocurrencies, Darren Neuschwander, a certified public accountant, said many tax preparers are frustrated because the IRS has long promised new guidance on cryptocurrencies that it hasn't yet released." "It's ironic that the IRS is issuing these letters because we're still waiting to know more rules," he said.

IRS Sends Out 10,000 Letters to Virtual Currency Investors, Some of Which Demand a Response, By Ed Zollars CPA for Kaplan Financial Education.

Blockchain Analytics Firm Chainalysis Outlines User Data Policy Amid Coinbase Allegations in CoinTelegraph.

The IRS Has Special Software to Find Bitcoin Tax Cheats. Fortune.com

GreenTraderTax cryptocurrency resources:

Tax Center

Blog posts on cryptocurrencies

Green's 2019 Trader Tax Guide

Trade accounting service for cryptocurrencies

Darren Neuschwander CPA contributed to this blog post.

Cryptocurrency Regulation Necessary to Keep Firms in US, Says Circle CEO - Cointelegraph

Posted: 31 Jul 2019 02:12 AM PDT

The CEO of cryptocurrency trading and investment firm Circle thinks the United States will create appropriate regulation as more companies move overseas.

Speaking to Bloomberg in an interview on July 31, Jeremy Allaire highlighted ongoing tendencies for crypto market participants to move abroad as a factor motivating future regulatory policy in Washington. 

Allaire's comments come in the aftermath of his testimony at Tuesday's dedicated crypto and blockchain policy hearing, the latest in a series of sessions U.S. lawmakers have held on the emerging industry. 

"The increase in proliferation of digital asset projects outside the U.S., the movement of companies to leave the U.S. and projects to get started outside the U.S. is definitely getting people's attention," he told the network.

He continued:

"I think it is ultimately going to lead to, ultimately legislative initiatives to try and ensure that there are appropriate safeguards and investor protections but also clarity, which is much needed to allow the technology and industry to flourish."

As Cointelegraph reported, the recent hearings have produced a wide range of reactions from lawmakers, from acknowledgment of Bitcoin (BTC) to claims it funds global terrorism.

On Tuesday, Senate Banking Committee chairman Michael Crapo became the latest official voice to suggest that it would be impossible for the government to ban decentralized cryptocurrencies such as Bitcoin. 

"If the United States were to decide that we didn't want cryptocurrency to happen in the United States and tried to ban it, I'm pretty confident we couldn't succeed," he said. 

Allaire meanwhile added that global appetite for cryptocurrency would take the form of crypto-style technology being implemented on top of existing fiat currencies first. 

"I think we'll see support from governments for central bank money that operates on top of these digital currency systems," he predicted.

Facebook's Digital Money Plan Raises Stakes For China's Cryptocurrency Ambitions - NPR

Posted: 31 Jul 2019 05:46 AM PDT

A Chinese national flag flutters in front of the People's Bank of China, the country's central bank, in Beijing. The bank plans to launch a cryptocurrency. Andy Wong/AP hide caption

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Andy Wong/AP

A Chinese national flag flutters in front of the People's Bank of China, the country's central bank, in Beijing. The bank plans to launch a cryptocurrency.

Andy Wong/AP

When Facebook announced plans in June to launch a new digital currency called Libra, the news sent monetary officials scrambling in China.

That's because since 2014, the People's Bank of China has been looking into building its own, centrally controlled cryptocurrency.

"We will keep a close eye on the new global digital currency," Wang Xin, research director at China's central bank, said of Libra at a conference in early July in Beijing. "We had an early start ... but lots of work is needed to consolidate our lead."

A digital currency would allow China's central bank to record every single transaction with high precision in real time. China's mobile payments already capture vast troves of data; estimates of nearly 2 billion accounts are registered between the two major platforms, Alibaba's Alipay and Tencent's WeChat Pay. A centralized digital currency would further cement China's dominance in financial technology.

"China relies on the mobile payments sector immensely. We have had a long lead time [over Libra] with the success of WeChat and Alipay, but Libra represents a huge threat on mobile payments," says Chuanwei Zou, chief economist at Bitmain, a large Chinese company that sells equipment used to create or "mine" cryptocurrencies.

Facebook hopes to roll out Libra in the first half of 2020, presenting the most significant competition to China's cryptocurrency ambitions. The U.S. social media company has 2.5 billion users, more than twice the amount commanded by WeChat. That gives Facebook an immediate leg up in the race for a global cryptocurrency.

"If Facebook is able to attract and turn a good number of its current users of Facebook and WhatsApp into Libra coin holders and users, it could immediately leapfrog all of what China has done in terms of building up users," says Martin Chorzempa, a research fellow at the Peterson Institute of International Economics.

Facebook is building a global coalition of partners, each with a stake in the Libra Association, a nonprofit organization registered in Switzerland that will manage the cryptocurrency day to day. Facebook says it has already signed on 27 partners, including Visa, PayPal and Lyft.

At stake in the cryptocurrency competition is control over financial data collection and the ability to conduct trade worldwide. The United States currently has an effective veto power over the global financial transactions system because so much of the world's commerce is done in U.S. dollars, allowing it to sanction its enemies and let its companies operate globally with little to no transaction costs.

China has long sought to unseat the dollar as the world's top currency with the yuan, also known as the renminbi.

"Having a global currency is a demonstration of a country's influence. It reflects the competitiveness of your country's economy," says Bitmain's Zou. "The fear is that Libra might replace renminbi's position in the world."

Libra will draw its value from a combination of major currencies, such as the dollar and the euro. Facebook has not said whether the yuan will be included. Depending on the final ratio, the new money could rely heavily on the dollar for stability.

China was once the biggest miner of Bitcoin and other cryptocurrencies, thanks to the country's cheap and plentiful hydropower used to fuel the processing power needed to create new digital coins.

But in 2017, Chinese regulators began a crackdown on Bitcoin and other digital currencies that persists to this day. The authorities wiped out private exchanges and banned the creation of new cryptocurrencies, over concerns that they would enable an exodus of money and destabilize the economy.

Should Libra take off, China might be convinced to loosen up its restrictive cryptocurrency regulations to allow big Chinese technology companies such as Alibaba and Tencent to issue competing digital currencies. Zhou Xiaochuan, the former director of the People's Bank of China, floated the idea of allowing "commercial entities" to issue tokens in a speech this month, according to a transcript.

Of course, China could also ban Libra from its cyberspace, just as it has already barred access to Facebook and its suite of products, Instagram and WhatsApp. But such a gamble might only work if Libra is not widely adopted.

"The problem for China is if Libra is really successful around the world and it's banned in China then China is in a losing position and its companies might be in a disadvantage in the digital economy versus companies that are able to accept Libra," says the Peterson Institute's Chorzempa. "That's quite a scary prospect."

Facebook executives are framing Libra as a necessary move to challenge China's advances in cryptocurrencies and the new money's record-keeping technology known as blockchain. "I believe that if America does not lead innovation in the digital currency and payments area, others will," David Marcus, the man in charge of making Libra happen, told members of the House Financial Services Committee in prepared testimony on July 17.

However, bipartisan concerns over the potential use of the Libra in illicit activities could delay its launch.

Bitcoiners are predicting the future of blockchain with #TheYearIs2030 - The Next Web

Posted: 31 Jul 2019 06:21 AM PDT

The year is still 2019, but Twitter's Bitcoin community is looking to the future.

Tons of Bitcoiners are sharing their predictions for the cryptocurrency and the blockchain industry 11 years from now with the hashtag #TheYearIs2030.

Blockstream CSO Samson Mow kicked off the trend with a sarcastic take on recent news of high-profile departures from popular cryptocurrency exchange Coinbase, which previously drew the ire of Twitter's cryptocurrency community with the acquisition of controversial blockchain analytics firm Neutrino.

In the tweet, Mow took a dig at Coinbase's loose token-listing criteria, forecasting its demise at the greediness of its co-founder and CEO Brian Armstrong.

He then invited the rest of the Twitterverse to follow his lead – and it didn't take long before the hashtag started gaining traction.

Soon enough though, the sarcastic Coinbase predictions expanded into memeing on popular crypto-personalities like EOS founder Dan Larimer, TRON's Justin Sun, Ethereum's Vitalik Buterin, and Bitcoin Cash's Roger Ver.

As you can expect, the banter swiftly escalated to some back and forth between supporters of the different networks.

Ethereum skeptics threw shade at the foundation's ongoing struggle to roll out a new and improved version of its network – more commonly referred to as Ethereum 2.0 – which promises to deliver significant improvements in transaction speed and cost efficiency.

On their part, Ethereum supporters responded with reminders that its blockchain offers more functionality than Bitcoin's.

Other predictions, though, focused on the future of blockchain tech and the inevitable disruption of the financial and banking sectors – one of the most popular narratives pushed by cryptocurrency enthusiasts.

Anyways, not a bad break from discussing what the symbol for the smaller denomination of Bitcoin – otherwise known as a "Saotshi" – should look like.

In the meantime, what's your prediction for the blockchain industry in 2030? Let us known on Twitter and don't forget to use #TheYearIs2030.

Published July 31, 2019 — 13:21 UTC

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July 31, 2019 — 13:21 UTC

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