Bitcoin's early link to criminal activity created some commonly-held and lingering misconceptions. Cryptocurrency ownership isn't "secret" and transactions aren't "anonymous."
In reality, cryptocurrency technology was designed to record transactions efficiently, transparently and in a verifiable, permanent way. Its owners store cryptocurrency by creating on-line "wallets." Exchanges where cryptocurrency is traded keep records, like stock brokerages, including account owner information. Misguided belief in cryptocurrency's secrecy is a primary reason why taxpayers, almost universally, fail to include it on tax returns. That mentality MUST change.
Cryptocurrency gained traction and popularity, but the IRS didn't say anything about it until March of 2014. That IRS announcement included taxpayer guidance and reporting requirements treating cryptocurrency like property, not currency. After another quiet period, the IRS recently released a list of high priority enforcement programs and their targets. Cryptocurrency is on that list, and the IRS has been aggressively gathering information to pursue enforcement actions. It sued Coinbase and got over 14,000 customer account records for the years 2013-2015. Other exchanges won't be far behind, and the IRS will get the information it needs.
Cryptocurrency non-reporting issues must be addressed quickly and, if possible, voluntarily. Even though the IRS isn't going to offer a special program with benefits for taxpayers who "come clean" and report voluntarily, there is still a lot to be gained from that approach.
IRS penalties are based on formulas but they aren't fixed numbers. The IRS has great discretion where penalty assessments are concerned. Voluntary efforts to resolve cryptocurrency reporting issues are your best chance to negotiate a penalty reduction. Also, remember that most cryptocurrency exchanges and wallets are located outside the U.S. That makes them foreign assets, subject to FBAR (Report of Foreign Bank and Financial Accounts), FATCA (Foreign Account Tax Compliance Act) and FinCEN (Financial Crimes Enforcement Network). In that case, the IRS can assess additional civil and criminal penalties for failure to report assets held in foreign accounts.
More importantly, electing to self-report is vital in avoiding criminal prosecution. If you filed tax returns and failed to properly disclose cryptocurrency income, you must amend those returns immediately. If you don't take action before a civil or criminal IRS investigation starts OR a third party (like an exchange) turns over your information, you're putting both your assets and your freedom at risk.
Sally is certified in crypto tax matters - contact us now!