Will the IRS Collect on Cryptocurrency?

By Alan Olsen
Will the IRS Collect on Cryptocurrency?

The digital age has changed the way the world operates. Just about every industry imaginable has been affected by technology already. That includes how we use and exchange money, over the Internet. Whether you call it bitcoin or cryptocurrency, or any other similar moniker, these forms of digital currency have become increasingly popular. They have also become a great wayto avoid tax payments, and the IRS wants its cut. All of it.

What is Cryptocurrency?

So what is cryptocurrency? According to the definition from Investopedia, “A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of acryptocurrency, and arguably its most endearing allure, is its organic nature. It is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”

Well-Suited for Tax Evasion

This is the exact reasonthat cryptocurrency has become so popular. In fact according to Investopedia, “The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.” Don’t think the IRS hasn’ttaken notice. According to the agency, it appears taxpayers are simply ignoring these payments, despite the fact the agency says they are not optional. So how bad is the problem. The IRS says that in 2016, out of the more than 130 million electronically filed returnsin the U.S., only 802 taxpayers reported cryptocurrency income.

Asking the Courts for Help

Obviously, the IRS is not happy with those numbers and they want more compliance. However, due to the nature of cryptocurrency, as previously mentioned, it is difficult for the IRS to track.Furthermore, there is no requirementcurrently in placethat forces cryptocurrency exchangesto report their transactions to the IRS. Thus, the IRS hasbegun to take other measures, including turning to the courts for help. For example, just last November, the Department of Justice filed a lawsuit against Coinbase asking the court to force the company to “turn over its records on all U.S. customers that transferred convertible virtual currency between December 2013 and December 2015.”

The Battle Continues

The initial response from the court was in favor of the Department of Justice. However, Coinbase, as well as it customers, is fighting back and for now the court’s ruling has been delayed. Furthermore, even if the IRSdoes gainaccess to these customers’ names, the fight will still be far from over. That’s because taxing the crypto gains will be very difficult, given that much of the trading happens on overseas exchanges. Additionally, with the IRS becoming moreactive in its efforts to track and tax these crypto gains, it’s more likely that many more of these transactions will move from the U.S. to overseas exchanges, as well.