As American taxpayers enjoyed pumpkin and apple pie, the IRS was busy working to get their slice of the virtual currency pie.
In its battle against virtual currency holders, the IRS got a significant win when U.S. District Court Judge Jacqueliine Scott Corley ordered Coinbase to give information pertaining to user accounts with at least the equivalent of $20,000 in any one transaction (buy, sell, send, or receive) from 2013 through 2015 to the IRS. Coinbase must disclose the tax identification number, name, birth date, address, records of account activity, and all periodic statements for each account with a $20,000 transaction during the relevant years. Although unconfirmed, I anticipate the applicable USD exchange rate for determining whether a single transaction meets the $20,000 threshold will be the rate at the time of the transaction, as opposed to today’s exchange rate.
In IRS Notice 2014-21, the IRS described how it will apply U.S. tax laws to virtual currency. The main takeaway from that Notice is that the IRS views virtual currency, such as Bitcoin, as property for U.S. tax purposes. For most taxpayers this means that capital gains tax is due upon the sale of virtual currency.
For example, assume Terry bought 1 Bitcoin for $5,000 (USD) on January 1, 2013, and then later sold 1 Bitcoin on December 1, 2013 for $9,000 (USD). Terry realized a short-term capital gain of $4,000. Terry’s gain is characterized as short-term because Terry did not hold his capital asset (1 BTC) for more than one year. According to IRS Notice 2014-21, Terry should report his short-term capital gain on Form 8949 when he files his 2013 income tax return. If you do not sell your virtual currency during the year, then consult with your tax advisor regarding whether any gains must be reported.
The IRS believes that taxpayers like Terry have been failing to report gains from the sale of virtual currencies. The IRS asserts that only 800-900 taxpayers reported sales of bitcoin on their tax returns in any given year from 2013 to 2015. With millions of users, the IRS concludes that there are Coinbase users buying and selling virtual currencies and not reporting the gains on their taxes. Whether virtual currency gains are unreported remains to be seen, but there are some Coinbase users who are about to experience the pleasures of dealing with the IRS. Don’t be one of them.