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As of this writing, one Bitcoin is worth about $10,330 in U.S. currency. But let's say you purchased some last year, when it was trading somewhere south of $5,000 and you'd like to unload some for a tidy profit. Do you have to report that income to the IRS?
The technical, legal answer is: Absolutely. The IRS considers Bitcoin and other digital and cryptocurrencies to be property for taxation purposes, so you are required to report trading gains or losses on your tax returns. However, many thought they could hide from the tax man behind Bitcoin's anonymity provisions. Those people may be in for a rude awakening come April.
According to crypto exchange Coinbase, who in 2017 turned over identifying information on over 10,000 users to the IRS, the federal agency is training its staff to hunt down digital wallets and their owners who could be hiding cryptocurrency holdings.
After a Cyber Crimes training presentation hit the internet this month, Coinbase confirmed with the IRS that the material "has been used around the world to various law enforcement partner audiences and was again given at this forum in a room that included partners from dozens of countries around the world as well as various press members."
"I can't discuss specific investigative actions that the agency may or may not take in the future," Justin Cole, director of communication and education at IRS' criminal investigation unit told Coinbase.
But the investigative techniques outlined in the training are expansive. In order to find out if someone is trading in Bitcoin or other cryptocurrencies, agents could engage in some normal detective work, like "interviews, Open Source searches, and electronic surveillance." Or, they could just issue subpoenas to "Apple, Google, and Microsoft for the Subject's complete application download history," and determine what apps they use and whether they were engaged in bitcoin transactions.
"Once a Bitcoin Address is identified, it can be looked up on a Bitcoin Block Chain Explorer to find information such as value, transaction times, transaction locations, which may help in corroborating information, identifying additional addresses, or assist in locating the Subject," according to the presentation. "It can also be used to show if bitcoins were transferred after a seizure warrant was served." So, your digital currency transactions may not be as "crypto" as you thought.
The IRS has also been sending warning letters to some taxpayers, specifically addressing their cryptocurrency holdings. Letter 6174 "begins by stating that the IRS has information that the recipient has or had one or more accounts containing virtual currencies," according to Above the Law's Steven Chung, and explains again that the IRS treats virtual currencies like non-cash property. "This means that trading a virtual currency for anything else is a taxable event, even trading one virtual currency for another."
"The Internal Revenue Service (IRS) is aware that 'virtual currency' may be used to pay for goods or services, or held for investment," the agency has warned. "In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability."
To find out what your tax liability on virtual currency trading might be -- and to avoid the IRS getting access to every app you've downloaded on your phone -- talk to an experienced tax attorney.