Cryptocurrencies are in the IRS crosshairs.
The agency started sending warning letters to 10,000 taxpayers in late July whom it believes have traded cryptocurrencies and failed to report the income.
Cryptocurrencies are treated currently as property rather than currency for US tax purposes. (For more detail, see “Bitcoins” in the April 2014 NewsWire.) This means anyone holding bitcoins, ethereum or other cryptocurrencies risks having to pay a tax on gain when the coins are used. A person is treated as if he or she sold property and used the cash to buy goods or services. This makes it impractical for individuals and businesses to use such currencies for ordinary course transactions because of the need to track gains and losses.
Taxpayer compliance is low. Credit Karma, a free on-line tax preparation service, reported in January 2018 that fewer than 100 of the 250,000 tax returns it filed that month reported owning cryptocurrency for tax purposes, a far smaller percentage than the 7% of Americans that are believed to own such currencies, and only one reported a gain or loss despite the huge swings in bitcoin prices during 2017.
The IRS is using “data analytics” to find traders. Some could be subject to criminal prosecution where there has been money laundering and perhaps in other cases.
The current IRS analysis of cryptocurrency tax treatment is in Notice 2014-21. The IRS said new guidance will be issued “in the near future.”