Tax Controversy and Litigation
Call for Free Consultation (410) 727-6600

Bitcoin Buffs Beware! IRS Ramps Up Efforts to Monitor Potential Criminal Activities Involving Virtual Currency

According to various news reports, the Criminal Investigation Division (CID) of the Internal Revenue Service (IRS) is ramping up efforts to track potential noncompliance caused by – and hidden through – the use of virtual currencies (or “cryptocurrencies”).  These efforts are occurring on multiple fronts and are likely to leave some unwary taxpayers with higher than anticipated tax bills, along with steep civil penalties.  For others, there may be potential criminal consequences.

Individuals or businesses buying and selling bitcoin need to be aware of the attendant tax and reporting obligations.  In 2014, the IRS released a notice declaring that bitcoin should be treated as property for income tax purposes.  Accordingly, if a taxpayer invests in bitcoin, they are required to report the net gain or loss from that investment when the bitcoin is sold.  For those who hold bitcoin as an investment for some time, the net gains may be substantial.  If bitcoins are used as a means of payment in a transaction (e.g., for good or services), the payor or recipient may be required to report the current amount (in U.S. dollars) to the IRS.  (For more information regarding the taxation of virtual currency, please review IRS Notice 2014-21.)  Dealing in bitcoin may trigger additional information reporting requirements, such as on FinCen Form 114, Form 8938, and others.

After allowing some time to pass after its initial release, the IRS is now following through with enforcement efforts to ensure compliance.  According to recent reports, CID has purchased multiple licenses with Chainanalysis, Inc., which enables the criminal investigation arm of the IRS to engage in “real-time investigation” of bitcoin networks.  In an interview with Tax Notes, CID Chief Donald Fort indicated that virtual currencies are frequently used for money laundering and, as of late, are more frequently being seen in cases involving potential tax evasion.  Mr. Fort’s remarks indicate that the agency is dedicated to educating and training special agents in this evolving area.  This training will more than likely be used to develop cases against increasingly sophisticated tax evaders.  Moreover, the Department of Justice has sought to enforce summonses against companies such as Coinbase, Inc. – an exchange used for virtual currencies – in order to obtain client lists and potentially develop investigations of tax wrongdoing.  Along with the development of its personnel, these legal actions underscore the attempt to increase CID’s network of information for building civil examinations and criminal prosecutions.  In the coming years, these preliminary IRS efforts will likely result in a significant number of enforcement actions.  To avoid potentially significant consequences, compliance issues must be addressed immediately.

Rosenberg Martin Greenberg has experience in all aspects of federal and state tax laws, including developments and required compliance in virtual currency transactions.  Our skilled tax advisors have represented countless businesses and individuals through the complex web of technical procedures and administrative options available in order to minimize their exposure to civil and criminal liability.  For a free consultation, please contact Brandon N. Mourges at bmourges@rosenbergmartin.com or 410.951.1149.

 

Rosenberg Martin Greenberg

25 South Charles Street, 21st Floor MD 21201
Phone: 410-727-6600
Map & Directions

Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
Map & Directions