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Tag Archive for Virtual Currency

Bare Bitcoins: No Fourth Amendment Privacy In Virtual Currency Records

Bare Bitcoins — No Fourth Amendment Privacy In Virtual Currency Records

Virtual currency has been around for a number of years now, and yet many still believe virtual currency transactions provide a level of anonymity and privacy not afforded by other types of monetary transactions. That simply isn’t true. With the right tools and understanding, it is possible to uncover the identities of virtual currency users. Moreover, virtual currency has led to the evolution of financial regulations, tax regulations, and legal regulations. In July, the Fifth Circuit dealt with whether Bitcoin users had certain Fourth Amendment protections from unreasonable searches and seizures. In short, they do not.

Bitcoin Transactions, Generally

Virtual currencies may take many forms, but the “Bitcoin” is perhaps the most well-known. Furthermore, Bitcoin transactions function in a very specific way. Bitcoin users maintain an “address,” which is a string of alphanumeric characters, much like a bank account number. A company or organization may form multiple addresses and combine them into a separate, centralized address, known as a “cluster.”

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Letter From The IRS To Taxpayers With Virtual Currency

Letter From IRS On Digital Currency

Reporting Virtual Currency Transactions

Have You Received This Letter From The IRS Recently?

Dear [Name]:
Why we’re writing to you. We have information that you have or had one or more accounts containing virtual currency and may not have
met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.

Virtual currency is considered property for federal income tax purposes. Generally, U.S. taxpayers must report all sales, exchanges, and other dispositions of virtual currency. An exchange of a virtual currency (such as Bitcoin, Ether, etc.) includes the use of the virtual currency to pay for goods, services, or other property,
including another virtual currency such as exchanging Bitcoin for Ether. This obligation applies regardless of whether the account is held in the U.S. or abroad. More information can be found on www.irs.gov and in Notice 2014-21, found at www.irs.gov/pub/irs-drop/n-14-21.pdf, which describes how general tax principles
for property transactions apply to transactions using virtual currency.
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What You Need To Know About Virtual Currency

What You Need To Know About Virtual Currency

You’re probably familiar with the common question, “Cash or card?” However, over the last decade, a newcomer has entered the race. Virtual currencies, and its subset “cryptocurrencies,” which use cryptography to validate and secure transactions, have exploded onto the scene, offering a brand-new avenue for commerce.

However, similar to the lack of consistency among economic nexus and marketplace facilitator laws, legislation concerning virtual currencies also varies wildly state to state.

A Brief History of Virtual Currency

While most people have at least heard of them at this point, there is still a great deal of confusion regarding virtual currencies, how they work and what exactly they are.

Bitcoin is the most popular form of virtual currency, first introduced in 2009 and valued for the first time in 2010.

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Virtual Currency Gains Prominence On 2020 Tax Return

Virtual Currency Gains Prominence On 2020 Tax Return

The 2019 Schedule 1 (Form 1040), Additional Income and Adjustments to Income, included a new question at the start of the form:

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”

On August 18, 2020, the IRS released the draft 1040 for 2020 and it shows this question has moved to page 1 of Form 1040 right below where you put your name and address.

For 2019, this seemed like an odd question since few individuals out of 150 million have any virtual currency (11% per a 2019 article by CoinTelegraph), and there are better questions to ask that affect far more people and potential income. For example, why not ask: ”Did you receive any funds from any web-based or Internet-based activity?”

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FinCEN Intends To Amend FBAR Regulations To Include Virtual Currency

FinCEN Intends to Amend FBAR Regulations to Include Virtual Currency

Every year, U.S. persons are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), if the total amount of their foreign accounts exceed $10,000.  Under current regulations, reportable foreign accounts include bank accounts, securities accounts, and certain other specified financial accounts (e.g., insurance accounts with cash values).  See 31 C.F.R. § 1010.350(c).

On New Year’s Eve, however, the Financial Crimes Enforcement Network (“FinCEN”) announced its intent to broaden the list of reportable accounts to include virtual currency.  Specifically, FinCEN issued a notice that provides:

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Can You Go To Jail For Failing To Disclose Virtual Currency On A Tax Return Or As Part Of An Offer For A Collection Alternative?

Virtual currency, such as Bitcoin, continues to be a topic of interest for the IRS. Indeed, for the 2019 tax year, the IRS added for the first time a unique question to Schedule 1, Additional Income and Adjustments to Income, which asks: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.” After the question, the taxpayer is required to check either “yes” or “no.” Predictably, there is no “maybe” box. Continuing with this theme, the IRS now intends to ask even more Americans the same question for the 2020 tax year. That is, the same question above will now be asked on Page 1 of the Form 1040, U.S. Individual Income Tax Return. Because more Americans file Form 1040 than Schedule 1, the IRS’ intentions are clear—it intends to continue to seek more information regarding taxpayers’ holdings and dealings in cryptocurrency. Notably, taxpayers who seek to offer collection alternatives to the IRS are also not immune. On the Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, it specifically requests the taxpayer to “[l]ist all virtual currency you own or in which you have a financial interest (e.g., Bitcoin, Ethereum, Litecoin, Ripple, etc.) If applicable, attach a statement with each virtual currency’s public key.” In light of all these developments, a common question I receive from clients is whether someone can actually go to jail for checking the box “no” where, in fact, he or she should have checked the box “yes.” The answer is: YES. Criminal Tax Laws. There are a host of criminal tax provisions enacted and designed to keep taxpayers honest with their tax filings. For example, Section 7201 makes it a felony for any person to willfully attempt in any manner to evade or defeat tax imposed under the Internal Revenue Code (e.g., Title 26) or any payment thereof. Thus, to maintain a successful conviction under Section 7201, the government must show: (1) willfulness; (2) the existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. See, e.g., U.S. v. Bolton, 908 F.3d 75, 89 (5th Cir. 2018). Generally, the statute’s terminology of “in any manner” has been construed broadly by the federal courts. See U.S. v. Daniels, 699 Fed. Appx. 469, 473 (6th Cir. 2017 (citing Spies v. U.S., 317 U.S. 492, 499 (1943)). Accordingly, false statements or the concealing of assets from the IRS can constitute criminal conduct under Section 7201. See U.S. v. Shoppert, 362 F.3d 451 (8thCir. 2004); U.S. v. McGill, 964 F.2d 222 (3d Cir. 1992). In line with these cases, the government could conceivably choose to go after a taxpayer under Section 7201 for the failure to properly check the box “yes” with respect to the cryptocurrency question now listed on the federal tax return. In addition, there is another criminal statute the government could use. Specifically, Section 7206(1) makes it a felony for any person to willfully make and subscribe any return, statement, or other document, which contains or is verified by a written declaration that is made under penalties of perjury, and which such person does not believe to be true and correct as to every material matter. Unlike a Section 7201 conviction, however, the government is not required to show the existence or proof a tax deficiency under Section 7206(1). U.S. v. Wilson, 887 F.2d 69 (5th Cir. 1989). But any measure of tax harm would of course remain significant for purposes of determining potential sentencing of the taxpayer under the Sentencing Guidelines. The government has utilized Section 7206(1) successfully in the past to obtain convictions against taxpayers who falsified answers to certain parts of a tax return. For example, federal courts have held that providing false answers to the questions at the bottom of Schedule B, Interest and Ordinary Dividends, concerning interests in foreign financial accounts or foreign trusts violates Section 7206(1). U.S. v. Clines, 985 F.2d 578 (4th Cir. 1992); U.S. v. Franks, 723 F.2d 1482 (10th Cir. 1983). Moreover, because Section 7206(1) applies to not only tax returns but also any “statement . . . or other document,” the government has successfully used Section 7206(1) to prosecute taxpayers who provide false answers to questions on IRS Form 433-A or IRS Form 656, Offer in Compromise. See U.S. v. Holroyd, 732 F.2d 1122, 1127-28 (2d Cir. 1984); U.S. v. Cohen, 544 F.2d 781 (5th Cir. 1975). Finally, the government can also use Section 7206(5) to prosecute taxpayers who provide false answers specifically to offers in compromise. See Gentsil v. U.S., 326 F.2d 243 (1st Cir. 1962) (charging Section 7206(5) for false OIC). Parting Thoughts. With the IRS’ increased focus on cryptocurrency, taxpayers should be aware that statements made on a tax return and/or collection-type forms may be used against them in a criminal prosecution. Accordingly, taxpayers should be careful in answering any and all virtual cryptocurrency questions on these forms.

Virtual currency, such as Bitcoin, continues to be a topic of interest for the IRS.  Indeed, for the 2019 tax year, the IRS added for the first time a unique question to Schedule 1, Additional Income and Adjustments to Income, which asks:  “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”  After the question, the taxpayer is required to check either “yes” or “no.”  Predictably, there is no “maybe” box.

Continuing with this theme, the IRS now intends to ask even more Americans the same question for the 2020 tax year.  That is, the same question above will now be asked on Page 1 of the Form 1040, U.S. Individual Income Tax Return.  Because more Americans file Form 1040 than Schedule 1, the IRS’ intentions are clear—it intends to continue to seek more information regarding taxpayers’ holdings and dealings in cryptocurrency.

Read more

What You Need To Know About Virtual Currency

What You Need To Know About Virtual Currency

You’re probably familiar with the common question, “Cash or card?” However, over the last decade, a newcomer has entered the race. Virtual currencies, and its subset “cryptocurrencies,” which use cryptography to validate and secure transactions, have exploded onto the scene, offering a brand-new avenue for commerce.

However, similar to the lack of consistency among economic nexus and marketplace facilitator laws, legislation concerning virtual currencies also varies wildly state to state.

A Brief History of Virtual Currency

While most people have at least heard of them at this point, there is still a great deal of confusion regarding virtual currencies, how they work and what exactly they are.

Read more

Virtual Currency Question Gains Prominence On 2020 Return – Why?

ANNETTE NELLEN: Virtual Currency Question Gains Prominence On 2020 Return - Why?

The 2019 Schedule 1 (Form 1040), Additional Income and Adjustments to Income, included a new question at the start of the form:

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”

On August 18, 2020, the IRS released the draft 1040 for 2020 and it shows this question has moved to page 1 of Form 1040 right below where you put your name and address.

For 2019, this seemed like an odd question since few individuals out of 150 million have any virtual currency (11% per a 2019 article by CoinTelegraph), and there are better questions to ask that affect far more people and potential income. For example, why not ask:”Did you receive any funds from any web-based or Internet-based activity?”

Read more

Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 (PDF) and Frequently Asked Questions(FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”
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Confusion Abounds – What Is Virtual Currency? Issues For Your 2019 Federal Return

Annette Nellen on Virtual Currrency

Likely, most people think of bitcoin, now over 10 years old, when they hear “virtual currency.” If you look at CoinMarketCap, you’ll see over 2,000 cryptocurrencies listed with bitcoin at the top given its market value. Others at the top include Ethereum, Bitcoin Cash, Litecoin, and Monero.

Well, what makes something a virtual currency in the eyes of the IRS? This is even a more important question for this current tax filing season due to a new question on Form 1040 Schedule 1 – At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

Schedule 1 is used to report other income, such as business and rental income, as well as deductions for AGI. So a lot of people file it. According to page 81 of the 1040 instructions, if the answer to the question is “no” and you don’t otherwise need Schedule 1, you don’t need to attach it.

This question raises a lot of questions, such as:
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Virtual Currencies: Additional Information Reporting And Clarified Guidance Could Improve Tax Compliance

Government Accountability Office On Virtual Currency

According to the Government Accountability Office, these are the facts:

As virtual currencies like bitcoin grow in popularity, how can IRS be sure that people are paying relevant taxes?

IRS addressed some taxpayer questions in its 2014 and 2019 virtual currency guidance. For example, the guidance says that using virtual currency can produce taxable capital gains.

But IRS could do more to help taxpayers comply. Financial institutions already report information about investment sales to IRS and taxpayers—to make both aware of any taxable income. While some virtual currency transactions are reported, not all are. Our would improve reporting and more.

Examples of Virtual Currency Transactions that Can Produce Taxable Capital Gains

What GAO Found
Taxpayers are required to report and pay taxes on income from virtual currency use, but the Internal Revenue Service (IRS) has limited data on tax compliance for virtual currencies. Tax forms, including the information returns filed by third parties such as financial institutions, generally do not require filers to indicate whether the income or transactions they report involved virtual currency.

IRS also has taken some steps to address virtual currency compliance risks, including launching a virtual currency compliance campaign in 2018 and working with other agencies on criminal investigations. In July 2019, IRS began sending out more than 10,000 letters to taxpayers with virtual currency activity informing them about their potential tax obligations.
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Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Cryptocurrency And IRS

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

Read more