If you have followed financial news over the past decade, then you have probably heard of Bitcoin. Introduced to the world in 2009, Bitcoin is an open-source, entirely digital currency. Since its inception, Bitcoin has been categorized by speculation, wild value swings, and the abrupt shuttering of a major currency exchange. More recently, Bitcoin values have skyrocketed, leading to IRS scrutiny.
Why Has Bitcoin Taken Off?
Because it is electronically secured using cryptography, Bitcoin is also referred to as a “cryptocurrency.” This is one of the benefits that investors see in the currency: that it is secure. In addition, investors see Bitcoin as a means of diversifying one’s portfolio, akin to investing in gold due to a fear of volatile markets or government instability.
Further, there has been great public and social media interest in cryptocurrencies, with Bitcoin easily having the greatest name recognition. Many celebrities, public figures, and analysts have publicly spoken in favor of Bitcoin, making it trendy among people who do not traditionally invest their money.
What are the Tax Implications of Owning Bitcoin?
In late June, it was reported that the IRS was aggressively investigating users of the Bitcoin exchange Coinbase. Coinbase has over half a million active users, and the IRS has issued a summons for data relating to every customer. The reason for this is two-fold. The first is that the Bitcoin market is unregulated, so the IRS does not receive reporting from these exchanges, like they would from a mutual fund. The second reason is that only 800 customers out of 500,000 filed any sort of tax form reporting their gains or losses from Bitcoin.
These efforts have been controversial, as Coinbase customers have been resistant to their information being released to the Federal Government. In addition, Congressional Republicans have pushed back against the IRS, stating that their use of a summons to identify half a million people is an overreach of its authority.
Bitcoin does not seem like it is going anywhere, with some analysts predicting that its value with further skyrocket by more than ten-fold in the next decade. Therein lies the problem with an unregulated asset that may or may not anonymously create great wealth for people. The question of the IRS’ ability to investigate and access this new wealth does not look like it will be answered anytime soon.
You Need an Attorney
It seems that new investment instruments are being introduced all the time. Some of them, like Bitcoin and other cryptocurrencies, seem too good to be true. The IRS is aware of these new instruments and has taken a great interest in taxing any gains. If you have questions or have been asked to provide information about untraditional investments, please call my office. I have been a tax attorney for over twenty years and have a Master of Law Degree (LLM) in Taxation. Contact The Law Offices of Robert S. Thomas at 847-392-5893 or visit our website today.