UNITED STATES - Complexity in reporting virtual currencies
Recent reports indicate that there are currently more than 1,600 known virtual currencies. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value. This may be used to pay for goods or services or held for investment. In some environments, virtual currency operates like real currency but it does not have legal tender status in any jurisdiction. Because transactions in virtual currencies can be difficult to trace and have an inherently anonymous aspect to them, some taxpayers may be tempted not to report these transactions to the Internal Revenue Service (IRS).
On 28 November 2017 a federal judge in a Northern California District Court approved a summons requiring the Bitcoin wallet service Coinbase, the world’s largest Bitcoin trading exchange, to hand over records of all transactions that took place from 2013 to 2015. This was part of a larger investigation into possible tax fraud by Coinbase users.
As a result of the summons, for accounts with at least the equivalent of USD 20,000 in any one transaction type during the 2013 to 2015 period, Coinbase was ordered to produce the following:
- Taxpayer ID number
- Date of birth
- Records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange)
- The post transaction balance
- The names of the counterparties to the transaction
- All periodic statements of account or invoices (or the equivalent).
It is likely that during 2019 the IRS will exhibit cryptocurrency criminal cases spotlighting fraudulent behavior as a result of the information obtained from the summons. Taxpayers need to be aware that unlike the IRS Offshore Voluntary Disclosure Program (OVDP) that encouraged taxpayers to be compliant by minimising penalties, the current Domestic Voluntary Disclosure Program (DVDP) does not. The current DVDP program for taxpayers whose omission was willful requires them to amend the most recent six years’ of tax returns and pay civil penalties for, at a minimum, the one tax year with the highest tax liability. However, the IRS can apply the penalty to multiple years based on the facts and circumstances in each case. This change no longer incentivises taxpayers to correct errors or omissions in past returns.
Income tax return reporting
The IRS has reminded taxpayers that income from virtual currency transactions is reportable on their income tax returns and provides reporting guidance for transactions involving convertible virtual currencies.
Convertible virtual currency received in payment for goods and services should be included in gross income at the fair market value in US dollars on the date received. Since the IRS categorises convertible virtual currencies as property, gains or losses should be reported when buying and selling the currency. As the use of blockchain becomes more prevalent, taxpayers compensated for mining or leasing their computer resources to validate virtual currency transactions and maintain the public ledger, should report the payment as income. If mining of virtual currency is deemed to be a business then the income will also be subject to self-employment tax.
Report of Foreign Bank Account and Financial Accounts (FinCEN Form 114, FBAR)
Taxpayer’s may also have a requirement to disclose their virtual currencies to the US Department of the Treasury. The last guidance issued by the Treasury only addressed regulations regarding the administering, exchanging or use of virtual currencies. With the IRS’ characterisation of virtual currencies as property, it could be argued that foreign property is not required to be reported on the FBAR; however until more definitive guidance is issued a reasonable approach would be to report virtual currency held in a virtual wallet that is hosted overseas.