As Part of its Ongoing Effort to Crack Down on Tax Evaders in the World of Virtual Currency, IRS is Requiring Coinbase To Turn Over Customer Account Information
According to the IRS, just 800 to 900 taxpayers reported their Bitcoin gains from 2013 through 2015 by filing Form 8949, which is used for reporting sales and other dispositions of capital assets. This figure stands in stark contrast to the number of U.S. taxpayers who may owe taxes on cryptocurrency transactions. According to Coinbase, it has approximately 5.9 million customers and has facilitated $6 billion in Bitcoin transactions.
In an effort to address the alleged non-compliance with U.S tax laws, the IRS issued a “John Doe Summons” to Coinbase seeking records on all of the company’s transactions between 2013 and 2015. The virtual currency exchange refused to comply, citing the privacy of its customers. In a recent court order, a California district court ordered Coinbase to turn over the records for all customers who made a transaction worth $20,000 or more between 2013 and 2015. Coinbase has estimated that this request would total 8.9 million transactions between 14,355 different account holders.
In a blog post, Coinbase characterized the court order as a partial victory, noting that the government was forced to vastly narrow the scope of its summons. “The government’s own lawyers noted at the hearing that the IRS is not accustomed to having to fight for records in this context, and most companies just turn records over without going to court,” the company wrote. “Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons.”
IRS Virtual Currency Guidance
For taxpayers who don’t want to face a potential enforcement action, the IRS has published guidance regarding how virtual currency should be treated for federal tax purposes. It states that virtual currency is considered property rather than currency for federal tax purposes. Accordingly, general tax principles applicable to property transactions apply to transactions using virtual currency.
The guidance, IRS Notice 2014-21, further provides that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers are required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
The IRS virtual currency guidance also advises that a taxpayer may have gain or loss upon an exchange of virtual currency for other property. “If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain,” the agency explains. “The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.”
The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes the capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.
Of course, this article provides only a brief overview of the potential tax consequences of virtual currency. Business and individuals that engage in Bitcoin or other virtual currency transactions should consult with an experienced tax attorney to address any additional compliance concerns. As with any potential tax issue, it is always wise to be proactive rather than wait for the IRS to come knocking.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Pittard, at 201-806-3364.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
IRS is Cracking Down on Virtual Currency Tax Evaders
Author: Scarinci Hollenbeck, LLC
As Part of its Ongoing Effort to Crack Down on Tax Evaders in the World of Virtual Currency, IRS is Requiring Coinbase To Turn Over Customer Account Information
According to the IRS, just 800 to 900 taxpayers reported their Bitcoin gains from 2013 through 2015 by filing Form 8949, which is used for reporting sales and other dispositions of capital assets. This figure stands in stark contrast to the number of U.S. taxpayers who may owe taxes on cryptocurrency transactions. According to Coinbase, it has approximately 5.9 million customers and has facilitated $6 billion in Bitcoin transactions.
In an effort to address the alleged non-compliance with U.S tax laws, the IRS issued a “John Doe Summons” to Coinbase seeking records on all of the company’s transactions between 2013 and 2015. The virtual currency exchange refused to comply, citing the privacy of its customers. In a recent court order, a California district court ordered Coinbase to turn over the records for all customers who made a transaction worth $20,000 or more between 2013 and 2015. Coinbase has estimated that this request would total 8.9 million transactions between 14,355 different account holders.
In a blog post, Coinbase characterized the court order as a partial victory, noting that the government was forced to vastly narrow the scope of its summons. “The government’s own lawyers noted at the hearing that the IRS is not accustomed to having to fight for records in this context, and most companies just turn records over without going to court,” the company wrote. “Thanks to Coinbase’s efforts, more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons.”
IRS Virtual Currency Guidance
For taxpayers who don’t want to face a potential enforcement action, the IRS has published guidance regarding how virtual currency should be treated for federal tax purposes. It states that virtual currency is considered property rather than currency for federal tax purposes. Accordingly, general tax principles applicable to property transactions apply to transactions using virtual currency.
The guidance, IRS Notice 2014-21, further provides that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers are required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
The IRS virtual currency guidance also advises that a taxpayer may have gain or loss upon an exchange of virtual currency for other property. “If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain,” the agency explains. “The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.”
The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes the capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.
Of course, this article provides only a brief overview of the potential tax consequences of virtual currency. Business and individuals that engage in Bitcoin or other virtual currency transactions should consult with an experienced tax attorney to address any additional compliance concerns. As with any potential tax issue, it is always wise to be proactive rather than wait for the IRS to come knocking.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Pittard, at 201-806-3364.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
