Bitcoin has been a hot property and a hot topic for discussion during 2017. San Francisco tax lawyer and Forbes author Rob Wood has previously discussed the tax consequences of Bitcoin transactions and the possibility of tax-free Bitcoin swaps. What about taxpayers who have failed to report gains and income from Bitcoin and other virtual currencies? In this report, Wood discusses the possibility of an IRS amnesty for Bitcoin users, also the subject of his Forbes article “Bitcoin Tax Troubles Get More Worrisome.”
Wood notes at the outset that a number of Bitcoin users have failed to report gains on Bitcoin and other cryptocurrency transactions. The IRS is paying attention to the world of virtual currencies. The Service succeeded in an action against Coinbase seeking information about customers who have used the service in cryptocurrency transactions. Wood suggests that “a lot of people should be worried about it.”
The IRS went after Coinbase using a John Doe Summons. The Service started the procedure in 2016. The action against Coinbase was not a criminal proceeding. Rather, it sought the names of cryptocurrency users for the purpose of seeing whether these people were properly reporting income related to these currencies. Wood says that the request was broad and open-ended on purpose. The John Doe part of the summons affirms that the IRS does not know the names of the customers, only that they exist and are Bitcoin users. There are obvious privacy concerns in such a discovery proceeding.
Wood points out that the use of a John Doe Summons has been part of the efforts of the IRS through the last decade to discover people who might be evading the tax law, including the Swiss banking industry. The IRS used this procedure against UBS to get the names of Americans using the Swiss bank who might not be reporting income or gains. UBS fought the request, but it ultimately complied with the disclosure request. It was, Wood says, “the shot heard round the world” from which the IRS ultimately collected over $10 billion.
Moving to the present, Wood opines that a lot of people probably thought that Bitcoin and similar currencies were anonymous and allowed a user to avoid reporting gains to the IRS. “Now, it’s very clear that someone will know” about cryptocurrency transactions. People who use Bitcoin should be reporting gains for their own protection.
Wood suggests that the IRS is at an early stage in its discovery process. There may be an amnesty program at some point, but it does not now exist. Wood says that people who have exposure through the use of cryptocurrencies need to understand that change is coming. “It’s always better . . . to fix the error voluntarily before you’re caught.” It is time for affected taxpayers to file amended returns. People who have these problems should probably discuss their situations with their lawyers or accountants.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.