It is believed that as of September 2017 at least 80% of all Americans have heard of bitcoin. Unfortunately, a lot of myths have been circulating on bitcoin and other crypto-currencies so here are the top eight myths to consider.
- Crypto-currency Is A New Phenomenon – FALSE. Bitcoin which is the world’s most popular crypto-currency has been around for a decade. An entity by the name of Satoshi Nakamoto published the designs of bitcoin in the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” in the midst of the U.S. financial crisis in 2008.
- Crypto-currency Is Not Legal – FALSE. Bitcoin is a legally accepted means of payment in many countries. There are 200,000 to 250,000 transactions per day. While some companies have expressed an outright rejection of payment in crypto-currency, other companies embracing it include, Microsoft, Intuit, DISH Network, Expedia and even Playboy Media.
- The Federal Government Does Not Deal In Crypto-currency – FALSE. The U.S. government is the biggest auctioneer of bitcoin. And the FBI manages one of the world’s biggest wallets with as much as $120 million worth of BTC. In 2013, the FBI seized 144,000 bitcoins connected to Silk Road which was a notorious narcotics network.
- Crypto-currency Transactions Do Not Get Reported To IRS – FALSE. Coinbase which is the virtual currency exchange in the United State and based in San Francisco has started the policy to issue 1099-K tax forms for a certain of its U.S. clients who following under the terms issued by the Federal District Court’s order have received cash above the required reporting threshold, which is more than 200 receipt transactions or greater than $20,000 during 2017. Clients caught in this reporting net will also include “business use” accounts and GDAX accounts. The issuance of 1099-K’s by Coinbase which will be distributed by email to its clients is no different than the 1099-K’s issued by Uber and Lyft to its drivers.
- U.S. Tax Laws Do Not Require Taxpayers To Report Crypto-currency – FALSE. Although both the public and the crypto community refer to bitcoin, altcoin, etc. as “virtual currencies”, the IRS in 2014 issued Notice 2014-21 stating that it treats them as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means including mining, air drops and initial coin offerings will be ordinary income.
- The Penalties Are Nominal If You Get Caught For Failing To Report Income From Crypto-currency – FALSE. Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% negligence penalty but that’s nothing compared to the 75% penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail. Any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).
- It Is Futile That IRS Will Get Information On Crypto-currency Transactions – FALSE. IRS already successfully pierced Coinbase. A John Doe Summons issued by IRS was ruled enforceable by U.S. Magistrate Judge Jacqueline Scott Corley in November 2017 (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431). Under the order, Coinbase will be required to turn over the names, addresses and tax identification numbers on 14,355 account holders. The Court has ordered Coinbase to produce the following customer information over the period of 2013 to 2015: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent).
- Waiting For IRS To Catch You Is The Best Strategy – FALSE. Now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties. Once the IRS has targeted you for investigation even if it is a routine random audit , it will be too late voluntarily come forward.
What Should You Do?
The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.
With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.
And now that like-exchange treatment is prohibited on non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties. Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.