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Cryptocurrency Traders Beware – The Taxman Cometh!

As the collective market cap of the cryptocurrencies has jump above $150 billion, traders and investors have accumulated significant gains. That’s the good news. The bad news is that the Internal Revenue Service is stepping up efforts to ensure that taxes are reported and paid. To assist in this effort, it has contracted with company that provides software that analyzes and tracks bitcoin transactions.

Back in 2014, the IRS issued guidance on the tax aspects of cryptocurrency. It characterized it as property, not a currency and set forth its position on the tax consequences. In short, it stated that general tax principles applicable to property transactions apply to transactions using virtual currency.

Despite that guidance, apparently only about 800 taxpayers declared either losses or profits in bitcoin in 2015. According to published reports, the IRS has been using this software since sometime in 2015. According to an IRS statement, it is using the software because it is “necessary to identify and obtain evidence on individuals using bitcoin to either launder money or conceal income as part of tax fraud or other Federal crimes.”

Last November the IRS issued a John Doe summons to one of the largest US cryptocurrency exchanges. According to IRS attorneys, “The ‘John Doe’ summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers who, at any time during the years ended December 31, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21.”

If you have successfully invested in cryptocurrency, it is important to understand the tax ramifications of your activities. One example in the guidance of which many people are not aware is that taxable gains can arise not just if you exchange appreciated currency for cash. Rather, according to the guidance, using appreciated currency can be taxable as well. According to the IRS, 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.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Partner

Jim Gatto is a partner in the Intellectual Property Practice Group in the firm's Washington, D.C. office. He is also Co-Team Leader of the firm's Digital Media Industry and Social Media and Games Industry Teams, and Team Leader of the firm's Open Source Team.

Areas of Practice

Mr. Gatto leverages his unique combination of nearly 30 years of IP experience, business insights and attention to technology trends to help companies develop IP and other legal strategies that are aligned with their business...

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