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Five on Fridays: 5 Questions for Bitcoin Investors and Traders

The IRS treats Bitcoin and other virtual currencies as property (not currency) for tax purposes. This means taxpayers are required to report any gains or losses on the sale of Bitcoins as they would with any other form of property (i.e. stocks).

In November 2016, the IRS issued a summons to Coinbase asking for the online currency exchange to provide a list of all account holders. When Coinbase pushed back, the IRS asked a federal judge to order Coinbase to turnover this information. The litigation is still ongoing, but in all likelihood, Coinbase will be compelled to turn over its account holder information (see https://www.bloomberg.com/news/articles/2017-11-10/coinbase-likely-to-lose-bid-to-block-irs-probe-of-customer-gains). 

Equipped with this information, the IRS will most likely pursue (both civilly and criminally) account holders who have failed to report their gains/losses on their tax returns.

Bitcoin investors should report all BTC transactions on their tax returns, and if they have not done so already, amend prior year returns to include these trades before the IRS comes calling. It's probably not a matter of if, but when.....

5 Questions for Bitcoin Investors and Traders to Ask Themselves:

1.    Am I reporting my BTC and virtual currency trading gains and losses on my tax returns? 

2.    Do I have a system in place for tracking my cost basis for tax purposes?

3.    Do my trades possibly qualify as 1031 like-kind exchanges, allowing me to avoid paying tax on an otherwise taxable transaction?

4.    Do I have a foreign account warranting disclosure on my tax return (to avoid the FBAR problems currently plaguing President Trump's former campaign chairman, Paul Manafort)?

5.    Do I need to register as a money transmitting business? 

For more information on the IRS and DOJ’s Bitcoin-related tax enforcement efforts, please see my article on Law360: https://www.law360.com/articles/886479/bitcoin-users-should-expect-more-irs-and-doj-scrutiny

Mark Milton