The Criminal Investigation division of the Internal Revenue Service (IRS) recently announced that details of new criminal cases involving cryptocurrencies, such as Bitcoin, will be released soon. This announcement is most likely related to an announcement made by the IRS in 2014 that cryptocurrencies would be treated like any other property for the purpose of assessing capital gains or other taxes on their acquisition and disposition. For example, suppose you purchased a Bitcoin back when the price was $500, and you recently sold it for $10,000. Under the 2014 IRS announcement, you have received a capital gain of $9,500 that is subject to capital gains tax. Failure to pay that tax results in civil penalties and potential criminal prosecution.
The IRS has been gathering information on cryptocurrency transactions for several years through “John Doe” subpoenas issued to cryptocurrency exchanges. Cryptocurrency is exchanged through a distributed ledger in which all transactions for a given protocol, or currency, such as Bitcoin, are made public. The details, such the public addresses of the sender and receiver, the amount of the transaction, and the timestamp, are kept private. It’s believed that the IRS has been combing the information that is provided under the “John Doe” subpoenas using algorithms and Artificial Intelligence to uncover the addresses of the parties to the transactions. In this way, the IRS can determine, for example, that John Doe purchased 10 Bitcoins on a given date for a price of, say, $100 each; and then sold them for a price of, say, $1,000 each. If John Doe didn’t report $9,000 as capital gains and pay the tax on that gain, he might be audited.
The IRS has recently sent thousands of letters, known as Letter 6174-A to individuals warning them that they could face civil or even criminal penalties regarding cryptocurrency dealings. According to this article in Forbes Magazine, appearing on July 26, 2019, this letter is probably going to all individuals identified from the Coinbase subpoenas, is generic, and should not be taken as a suggestion that the recipient is suspected of tax evasion.
