Earthquakes can be catastrophic events due to massive forces and unpredictability. Science always looks for clues to figure out when the next “big one” will arrive. In the tax arena, I can’t predict but there’s an earthquake looming, aimed at persons who own, trade or use virtual currencies (“crypto”).
The IRS responds slowly to technology. Early 2014 guidance simply said crypto was “property” and that crypto income or gain just had to be reported like any other property.
In November 2016 the IRS went after Coinbase, a large San Francisco based crypto exchange, seeking trader information. In 2017 the IRS won—a list of persons with at least one transaction of $20,000 or more between 2013 and 2015.
In June 2019 the IRS sent letters to 10,000 persons urging “review” of tax reporting on account of crypto transactions. Two additional versions of the letter exist, in which the IRS states “potential misreporting” of transactions, or even requesting specific taxpayer responses.
This month, H.M. Revenue and Customs (the British IRS) requested user names and transaction data from UK based exchanges. The tectonic plates are beginning to shift all over. Tax administrators have seen not just massive money floating around, but unreported and untaxed money.
From IRS court filings: “There has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.”
And that takes me to the next point, the likely earthquake.
So far, “foreign” crypto is not reportable under Foreign Bank Account Report (FBAR) or Form 8938, Report of Specified Foreign Financial Assets. But all those IRS letters can’t be seen in isolation, they must be part of a broader effort. That could be updated guidance, including new reporting requirements for “foreign” crypto. And if this concerns you, you should follow this closely.
If “foreign” crypto holdings are reportable, I would expect some type of shoehorning into existing FBAR/8938 reporting schemes… akin to a square peg in a round hole. This would likely require potentially massive information gathering from its owners, just to be able to comply. I would urge crypto holders to begin looking now at their holdings, to begin getting a grasp of the magnitude of data that could be needed: exchanges, transactions, digital wallets, valuation of e-coin, and more. Forewarned is forearmed!