What Should You Do if You’ve Already Filed an Inaccurate Return?
Less than a month before the 2018 filing deadline, the Service cast a much wider IRS Bitcoin net than the one it used in 2014. This news is particularly unsettling to the estimated 13,000 Coinbase account holders whose information was involuntarily turned over to the IRS.
In a March 2018 release, the IRS repeated some familiar lines. Bitcoin profits are subject to the capital gains tax. Since the price of cryptocurrency varies significantly among different exchanges, this is a tricky exercise. 1099 and W-2 crypto payments are taxable as well. Here’s where the expansion comes in. The latest news release also states that “A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.” Criminal tax evasion carries a maximum five years in prison and $250,000 fine, in addition to penalties and interest.
About a month earlier, Coinbase dropped its fight against a November 2016 administrative summons. As a result, the IRS now knows account details about certain Coinbase accountholders between 2013 and 2015. The Bitcoin exchange limited its release to accounts of over $20,000. Given the cryptocurrency’s significant increase in value since 2015, the IRS will most likely be very interested in this list.
The IRS, Bitcoin and Taxes
The good news is that, for the most part, the IRS adhered to its original notice, which defined cryptocurrency as property. Essentially, Bitcoin is like a precious metal. Although gold can sometimes be used like money, the metal itself is not currency. The analogy does not quite work if you keep your Bitcoin in a wallet as opposed to an exchange. So, that may be the next IRS Bitcoin area of scrutiny.
Crypto-to-crypto conversions may also trigger capital gains taxes. For example, if an investor converts Likecoin to Bitcoin, the investor must generally pay taxes on the increase. We say “generally” here because there is a like-kind exchange loophole in Section 1031. However, the 2017 tax code rewrite closes this loophole as of the end of 2018, so enjoy it while it lasts.
The Domestic Voluntary Disclosure Program
Since the 1950s, the IRS has operated a limited amnesty program for taxpayers who accidentally or intentionally filed erroneous returns. The DVDP does not forgive penalties and interest, but it does eliminate the risk of a criminal prosecution. If the income in question was illegal, the DVDP does not apply.
Individuals with several unfiled returns can voluntarily come clean, with the aid of an attorney. The feds prosecuted actor Wesley Snipes over just three years of unfiled returns. But generally, the IRS seldom takes action over fewer than six years of unfiled returns.
More importantly for IRS Bitcoin purposes, the DVDP applies in tax evasion cases. The aforementioned penalties and interest may include the 75 percent fraud penalty.
Procedurally, an attorney sends a letter to the IRS attaching amended returns and promising to pay penalties and interest. The amended returns must be truthful, timely (i.e. sent before the IRS initiates a civil or cirminal investigation), and complete. There are other ways to enter the DVDP, but this method is by far the easiest one.
If the latest IRS Bitcoin news made you nervous, talk to a tax attorney before things get bad.
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