IRS Turns Up the Heat on Bitcoin and Digital Currency Users

 In Tax News

The IRS has taken a major step in the fight to obtain data on Bitcoin and other digital currency transactions.  A federal court has authorized the IRS to serve a John Doe Summons on Coinbase, Inc., a digital currency transaction company. The IRS wants information on the site’s users and their transactions. Some Coinbase users, led by Mr. Jeffrey K. Berns, moved to intervene in the IRS’s case to enforce the summons arguing it threatened their privacy.

The IRS has now pushed back against this motion to intervene arguing that Mr. Berns should not be allowed to intervene, because Mr. Berns has already identified himself in court as a user of Coinbase, so he can’t object that his privacy is threatened. The purpose of a John Doe Summons, the IRS points out, is that the IRS does not have taxpayer identities.

On January 3, 2017, Mr. Berns filed a reply arguing that the John Doe summons statute does not allow the IRS to shield itself from inquiries into whether it has acted in good faith.

The reality, however, is that even if Coinbase customers are allowed to intervene in the case, the IRS is likely going to get the information in the end. Courts generally give the IRS wide latitude to request information that could be relevant to tax investigations. The IRS wins the vast majority of summons enforcement cases.

Any success by the IRS on its summons could put users of digital at risk. The IRS is likely to use the information to match transactions to tax returns. Taxpayers who have failed to report income or transactions related to Bitcoin and other digital currency sales could face taxes, civil penalties and possibly criminal prosecution and imprisonment.

Given the risks, taxpayers who have failed to properly report income or gains from Bitcoin and other digital currencies should meet with a tax attorney now to discuss their options.  If you have questions about your Bitcoin or digital currency transactions and proper tax reporting, contact Hone Maxwell LLP for assistance today.

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