Back in September, the Treasury Inspector General for Tax Administration (“TIGTA”) issued a final report: As the Use of Virtual Currencies in Taxable Transactions Become More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance.[i] This report, issued September 21, 2016, focused on the use of virtual currencies in transactions, such as Bitcoin, and the IRS’s strategy for addressing income produced through virtual currencies. With the anonymity provided by using a virtual currency like Bitcoin, TIGTA was concerned about the likelihood of their use in illegal transactions.
The IRS had previously established the Virtual Currency Issue Team and issued Notice 2014-21, Virtual Currency Guidance, but TIGTA’s review found there to be little evidence of coordination among the IRS operating divisions to develop a strategic approach to the tax implications of virtual currencies, noting that none of the IRS operating divisions had developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies.
In Notice 2014-21, the IRS states that convertible virtual currency for federal tax purposes is treated as property subject to the general tax principles that apply to property transactions.[ii] For example, if the virtual currency is a capital asset in the hands of the taxpayer, the taxpayer should be reporting capital gains or losses on all exchanges of or transactions involving virtual currencies. TIGTA found that although the IRS had received comments from taxpayers in response to Notice 2014-21 asking for additional information that would be helpful in understanding how to comply with the tax reporting requirements when using or receiving virtual currencies, the IRS had taken no action in response.
As a result of its findings, TIGTA recommended that the IRS: (1) develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation; (2) provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies; and (3) revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.
We are now seeing increased action from the IRS to target taxpayer noncompliance on transactions involving virtual currencies. On November 17, 2016, the Department of Justice petitioned a district court to serve a John Doe summons to Coinbase, the largest Bitcoin exchange in the United States, asking for the records of all customers who bought virtual currency from the company from 2013 to 2015.[iii] The John Doe summons was supported by a declaration by a senior revenue agent with the IRS’s offshore compliance initiatives program, whose exam of two corporate entities that had accounts at Coinbase resulted in admissions of using Bitcoin purchases as part of a tax evasion plan.
The John Doe summons would require the San Francisco-based startup to turn over the identity and full transaction history of millions of customers to the IRS. In response, Coinbase stated in a company blog post on November 18th that it will oppose the current form of the petition in court, out of concern for its customers’ privacy.[iv]
LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a senior tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere in complex civil tax litigation and criminal tax prosecutions (jury and non-jury). She represents U.S. taxpayers in litigation before both federal and state courts, including the federal district courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the Ninth Circuit Court of Appeals. Ms. Strachan has experience in a wide range of complex tax cases, including cases involving technical valuation issues. She routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. Additional information is available at
[i] The full report is available at: http://www.treasury.gov/tigta/auditreports/2016reports/201630083fr.pdf
[iii] United States’ Ex Parte Petition for Leave to Serve “John Doe” Summons filed November 11, 2016, In The Matter of the Tax Liabilities of John Does, United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21, Case No. 3:16-cv-06658-JSC (N.D. Cal).