The IRS is looking for bitcoin tax evaders. The Department of Justice has filed major requests in federal courts requesting identifies of all customers who have bought bitcoin from Coinbase. The document, known as John Doe summons, can only be served by the IRS if there is federal court approval. The summons are proof that the IRS believes people have failed to comply with tax laws.
The IRS is firm, that people are using bitcoin to evade taxes. Companies have been found to misreport purchases of Bitcoin. The main objective of this initiative by the IRS is to pursue offenders who are not recording virtual currency transactions properly.
There are many tax implications when it comes to Bitcoin. The tax implications of Bitcoin are similar to shares of stocks, or other security asses which need to be tracked on an order by order basis. The IRS has indicated that the normal basis rules paply to bitcoins, as a result Bitcoin users have the option to sell their currency on a FIFO basis, LIFO basis, or a selective cost basis method. In a rising market, LIFO produces the lowest tax liability. FIFO is good in a falling market.
You must maintain records for tracking. Taxpayers also need to be aware of the fact that if they are paid with bitcoin for services, these coins are self-employment income and subject to self-employment tax. As a result, they must be reported.
Most bitcoin users were not aware until 2016-2017 that they were supposed to record gains and losses. Because of the John Doe summons, you are at risk for tax evasion. You could be subject to penalties for failure to comply with tax laws. Underpayments that can be traced to virtual currency transactions can also include accuracy-related penalties, and other information relating to reporting penalties. Penalty relief can be available to taxpayers, and people, who are required to file an information return.
You must reach out to an experienced attorney as soon as possible to ensure you’re prepared to respond to the IRS, if they ever audit you.
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