Bitcoin Users May Be Cheating on Taxes

An IRS investigation finds only a tiny percentage of virtual currency owners are declaring earnings on Bitcoin transactions in their annual returns.
Matthew HellerMarch 28, 2017
Bitcoin Users May Be Cheating on Taxes

An Internal Revenue Service investigation into tax evasion related to Bitcoin has found that only a tiny percentage of virtual currency owners are declaring profits or losses on Bitcoin transactions in their annual returns.

As part of the investigation, the IRS is seeking a court order requiring virtual currency exchange Coinbase to turn over customer data, including every customer account as well as detailed transaction records. Coinbase hosts more than one million customer accounts.

Court papers filed by the IRS show the results of a computer analysis of hundreds of millions of tax returns filed for the tax years 2013 through 2015. According to IRS agent David Utzke, only “802 individuals reported a transaction on Form 8949 using a property description likely related to  bitcoin.”

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The numbers were similar for the two previous years — 893 in 2014 and 807 in 2013.

Capital gains or losses from property transactions are reported on Form 8949. The IRS considers gains and losses from virtual currency to be property transactions.

“The majority of Americans who trade in Bitcoin are likely breaking the law,” Forbes said, noting that the number of U.S. citizens who conducted at least one Bitcoin transaction in 2015 “probably numbers in the tens or hundreds of thousands.”

In some cases, Fortune reported, profits from Bitcoin transactions “could be significant given the virtual currency soared from $13 to over $1,100 during the three year period (2013-2015) for which the agency is seeking information.”

The IRS issued a subpoena requesting customer data from Coinbase last year. After the exchange claimed the agency’s demands were overbroad, the IRS filed a federal lawsuit earlier this month seeking a court order.

Coinbase said it has yet to turn over any information. “Coinbase remains concerned with the indiscriminate and overbroad scope of the government’s summons and we have produced no records under the summons,” Coinbase lawyer, Juan Suarez, wrote in a blog post.

“The upshot of all this is that many Coinbase customers are likely to feel uneasy since the investigation could eventually lead them to owe back taxes or penalties, or even see the IRS seize their accounts,” Fortune said.