The Trap Tightens: US Taxman Casts a Beady Eye on Bitcoin and Other Cryptos

Bizarrely, many people who use Bitcoin and other cryptocurrencies labor under the delusion that those transactions aren’t subject to tax reporting and tax compliance

By Yves Smith and cross-posted from Naked Capitalism

Even in the US, which so far has been more lenient toward cryptocurrencies than China, the noose is tightening. Top Bitcoin exchange Coinbase has decided that trying to defy the law, in terms of not complying with a IRS summons requiring it to turn over information about customers who had engaged in more than $20,000 in Bitcoin transactions in a year, was not a viable position. Apparently Coinbase had had the Silicon Valley libertarian chutzpah to think the rules didn’t apply to them. The IRS does not regard “disruption” as a tax exemption.

Bizarrely, many people who use Bitcoin and other cryptocurrencies labor under the delusion that those transactions aren’t subject to tax reporting and tax compliance. As we reported at the time, in 2014, the IRS determined that Bitcoin was property, not a currency. That meant that gains on trading in Bitcoin are taxable the same way gains on trading in currency futures or selling a piece of land are.1 That means, and that means you, those transactions are reportable as income for US taxpayers.

The supposed virtue of cryptocurrencies like Bitcoin is their Achilles heel as far as hiding from the taxman is concerned. The famed blockchain contains the full ledger for each coin, meaning the history of all transactions, and that record cannot be altered. The blockchain contains the date and time and the amount of each transaction, as well as the unique identifier for the wallet associated with that transaction. Knowing the wallet does not get you to the holder of the wallet, but it gets you a fair bit of the way there. As Lee Sheppard pointed out in Tax Notes last year:

Moreover, many transactions are now settled off the blockchain and never recorded there. The exchange that processed the transactions would have the only records. From an investigatory standpoint, the blockchain’s limitations and the widespread practice of off-chain clearing combine to make the blockchain more like the Depository Trust Company, which holds publicly traded shares on behalf of brokers, who control information about beneficial owners. To find the owner, it is necessary to sue the intermediary in each case.

That isn’t as far-fetched as you might think

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