Remember the days when Swiss banks (as well as banks in other countries) refused to reveal their customers’ names? Some very wealthy Americans placed their assets in these foreign banks to hide them from the IRS to avoid paying income taxes. The IRS began serving “John Doe” warrants to foreign banks to compel those banks to release the names of account holders on certain bank accounts. This was followed by a tough crackdown by the IRS on taxpayers who failed to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), which certain foreign bank account holders are required to file (and face stiff penalties for not filing, including jail time).
You may not have heard of crypto currency. However, you likely have heard of Bitcoin which is a form of crypto currency. The use of crypto currency has definitely caught the attention of the IRS just like foreign banks did many years ago. Why is the IRS interested in crypto currency? First, the trading of these currencies is a taxable event. Second, the IRS is concerned about the use of this currency to launder money.
The IRS recently was granted a court order allowing it to serve a John Doe summons on Coinbase Inc. which operates a virtual currency wallet and exchange business. Coinbase, a digital asset exchange company headquartered in San Francisco, operates exchanges of bitcoin and other digital assets with currencies in 32 countries and bitcoin transactions and storage in 190 countries worldwide. The summonses asked Coinbase to identify all United States customers who transferred convertible virtual currency from 2013 to 2015. Similar to when the IRS went after a select few Swiss banks before it broadened its scope, Coinbase will likely just be the first of many IRS crypto currency trading companies targeted by the IRS.
When U.S. dollars are converted to a crypto currency and then one crypto currency is converted to another type of currency, that is a taxable event. For illustration purposes, consider that when one converts his cash into gold, he is making an investment in a commodity. When that gold is sold, the investor has a gain or loss on that transaction. Likewise, if the investor trades his gold bullion for another commodity, such as silver, that is also a taxable transaction. The taxation of crypto currency works the same way.
In response to concern over virtual currencies and their perceived potential for evading taxes, the IRS issued Notice 2014-21 in March 2014. This notice gave guidance on everything from paying employees with crypto currency to how the various trades between different currencies are treated.
We would not be surprised if the IRS includes sometime in the future a check the box for taxpayers to answer if they engage in the trading of crypto currencies, similar to the question that is asked today on IRS Form 1040 Sch. B about investing in foreign banks.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
