Keyword: virtual currency

IRS to Virtual Currency Traders: No Formal Voluntary Disclosure Program

The IRS recently announced that it is not planning to establish a formal voluntary disclosure program for taxpayers who have unreported income derived from virtual currencies. Specifically, Daniel N. Price of the IRS’s Office of Chief Counsel stated on November 8, 2018 that he needed to dispel the rumor that had been circulating since last year that the IRS intended to establish a separate voluntary disclosure program for unreported income related to offshore virtual currencies. This is in contrast to the voluntary program that the IRS established for unreported income from offshore financial accounts.

Under IRS guidance from 2014, the IRS classified Bitcoin and other virtual currencies as property (rather than foreign currency). Accordingly, any income from virtual currency transactions is treated as either ordinary income or capital gains, whichever is applicable based on the activity that gave rise to the income (e.g. investment or mining). Because the IRS requires a U.S. taxpayer to report its worldwide income regardless of where that income was generated or where the taxpayer lives, a U.S. taxpayer could have significant income tax liability for its cryptocurrency activities that were conducted and remain offshore. In spite of this substantial U.S. taxpayer exposure, and despite the potentially enormous amount of unreported income from virtual currency activities, the IRS has provided relatively little guidance to taxpayers and tax professionals, given the complexity of the tax issues and reporting requirements triggered by virtual currencies. At the same time, as discussed previously in On the Chain, the IRS is preparing to collect the massive amount of tax from unreported income from Bitcoin-related trades.

The IRS is Closing in on Cases Regarding Bitcoin Income Reporting

Following a several-year court fight, the Internal Revenue Service (the IRS) appears to have obtained a substantial amount of information regarding individuals’ transactions in cryptocurrency, and the agency might be in a position to make criminal referrals of failures to report income from such transactions. In December 2016, the IRS, believing that virtual currency gains have been widely underreported, issued a summons demanding that Coinbase, the largest U.S. cryptocurrency exchange, produce a wide range of records relating to approximately 500,000 Coinbase customers who transferred Bitcoin, a virtual currency, from 2013 to 2015. Formed in 2012, Coinbase has served at least 5.9 million customers and handled $6 billion in transactions. Coinbase did not comply with the summons.

In seeking to enforce the summons in the Northern District of California, the IRS cited the fact that while approximately 83 percent or 84 percent of taxpayers filed returns electronically, only between 800 and 900 persons electronically filed a Form 8949, Sales and Other Dispositions of Capital Assets, that included a property description that was “likely related to bitcoin” in each of the years 2013 through 2015. Presumably, the IRS believes that more than 900 people made gains on bitcoin trading during that period.

On November 28, 2017, the court enforced but modified the summons by requiring Coinbase to provide documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send or receive) in any one year from 2013 to 2015. The order required Coinbase to provide: (1) the taxpayer’s ID number, name, birth date and address; (2) records of account activity, including transaction logs or other records identifying the date, amount and type of transaction, i.e., purchase/sale/exchange, the post-transaction balance and the names of counterparties to the transaction; and (3) all periodic statements of account or invoices (or the equivalent).

The IRS appears to be getting closer to the prospect of criminal cases:

  • In March 2018, Coinbase informed 13,000 of its customers that it would be giving information on their accounts to the IRS.
  • At the recent Tax Controversy Institute in Beverly Hills, Darren Guillot, Director (Field Collection), IRS Small Business/Self-Employed Division, said that “[he] has had access to the response to the John Doe summons served on Coinbase, Inc. for two months and has shared that information with revenue officers across the country.”
  • Bryant Jackson, Assistant Special Agent in Charge (Los Angeles), IRS Criminal Investigation Division, recently said that CI has been expecting fraud referrals from the Coinbase summons response.
  • CI and the Justice Department Tax Division have been discussing those anticipated cases and issues that may arise in them, such as proof of willfulness.

It is noteworthy that in Notice 2014-21, the IRS answered a series of questions related to the taxation of cryptocurrency (which it refers to as “virtual currency”). In the Notice, the IRS indicated that penalties would apply for failures related to the reporting of gains under section 6662 and failure to file information returns under sections 6721 and 6722. While the Notice specifically provided that penalty relief may be available to taxpayers and persons required to file an information return who are able to establish reasonable cause, it did not provide any indication as to whether reasonable cause relief would be available for taxpayers who failed to report cryptocurrency-related gains. More recently, on July 14, the Large Business and International division of the IRS initiated a Virtual Currency Compliance Campaign to address noncompliance issues.

While there may be valid reasons for failure to report cryptocurrency-related gains, taxpayers who are among the 13,000 Coinbase customers should be particularly concerned about the penalties that might apply due to the failure to report their gains.

Recent Reports Show UK and EU (Slowly) Progressing Towards Virtual Currency Regulation

Currently there is no EU-harmonized approach for the specific regulation of virtual currency. In September 2018, the UK’s Treasury Committee released a report on crypto-assets as a part of its ongoing Digital Currencies Inquiry, in which the Committee strongly and unanimously recommended that the UK regulate virtual currencies and initial coin offerings (“ICOs”) as a matter of priority. It will be important for the UK not to be too restrictive as this could drive innovative business away from the UK. The EU Parliament’s All-party Innovation Group has drafted a proposal examining potential new rules that would bring ICOs within the scope of the EU-wide harmonizing crowdfunding regulation that is currently being drafted. While it is certain that any regulation needs to be carefully considered, the lack of a harmonized approach to regulation of ICOs will lead, as is happening currently, to a piecemeal approach across member states that will hamper blockchain developments.

Learn more from this recent Orrick-authored alert.

Virtual Currencies Fall Within Scope of EU’s Fifth Anti-Money Laundering Directive

The fifth iteration of the Anti-Money Laundering Directive (MLD5) took effect in July 2018. In addition to several updates covering a wide range of anti-money laundering objectives, MLD5 extends its coverage to include certain cryptocurrency service providers.

Learn more about the updates under MLD5, including further details regarding the inclusion of cryptocurrencies within the scope of EU anti-money laundering and terrorist financing regulations, in this recent alert.

CFTC Chairman Includes Fintech and Virtual Currency in Agency’s Priorities

On July 25th, 2018, CFTC Chairman Giancarlo addressed the House Committee on Agriculture regarding the agency’s priorities and recent work. A significant portion of his testimony focused on the CFTC’s oversight of fintech and cryptocurrencies.

Learn about the CFTC’s regulatory approach to cryptocurrency and distributed ledger technology in this recent derivatives post.