Think you can use Bitcoin to avoid paying taxes? Think again. As cryptocurrencies have risen in popularity, tax regulators are taking notice. The Internal Revenue Service issued guidance in 2014 outlining some of the tax implications for Bitcoin and other virtual currencies. Last fall, the Treasury Inspector General for Tax Administration issued a report about possible use of virtual currencies as a means to avoid taxes, and urged the IRS to implement policies to address the issue.
In the past few days, however, an update to the investigation launched by the IRS against Coinbase has brought the issue to light again, just in time for income tax season. Coinbase provides a platform for storing virtual currencies in a digital wallet, and is also a currency exchange where Bitcoin and Ethereum can be traded with other forms of currency. A judge has ruled that the IRS can order Coinbase to turn over information about customers who bought and sold Bitcoin through their company between 2013 and 2015. According to an article in the New York Times about the case, Coinbase had previously complied with “narrowly-tailored requests”. This latest ruling requires identity and transaction information for all customers in the two year time period, which is potentially troubling from a privacy perspective.
The guidance from the IRS for virtual currencies says that individuals should treat virtual currencies as property, and not as legal currency, for tax purposes. This often conflicts with how individuals use and understand Bitcoin. In true Washington fashion, a lobbying group has formed to represent the interests of digital currency markets and exchanges. Called the Digital Asset Tax Policy Coalition, the group is under the Chamber of Digital Commerce, and aims to push for updated tax policies which are more friendly to cryptocurrencies.
Much of the legal wrangling in the cryptocurrency realm comes down to issues of internet governance, and the application of analog rules in a digital world. Bitcoin is designed to work as a global, anonymous, and decentralized virtual currency, which often runs contrary to the mandate of the Department of the Treasury to manage currency and collect taxes from US citizens. This court case will likely be one more step in the process of government policies evolving with technology.