In my last column, I reported that the IRS is going after people who trade bitcoin and other virtual currencies — and didn’t bother to pay tax on their gains.
In fact, I’m told the IRS sent out 10,000 letters to people who could be tax scofflaws because of virtual currency transactions and not reporting gains on those trades.
The IRS got these individuals’ names from Coinbase, an online platform that allows people to buy and sell bitcoin, ethereum and other cyber coins. And since Coinbase brags that it has 13 million users, a lot of other people could soon expect letters.
So what happens next? I spoke with Timothy Speiss, a partner at the accounting firm EisnerAmper who is aware of the IRS letters.
Speiss says that if someone can prove that they are “investors” in virtual currencies and they held onto their positions for more than a year, they will be taxed at the capital gains rate of 20 percent for federal tax purposes.
But if they are deemed to be “traders” — meaning they got in and out of positions — and didn’t hold onto them for a year, the taxpayer could be charged at the ordinary income rate.
That could be as high as 37 percent.
“The IRS is going to argue that someone who trades frequently and at high volume will be subject to get the ordinary tax rate at 37 percent,” Speiss says. “Traders need to be careful.”
What makes matters worse is that many virtual-currency traders probably haven’t paid tax for a number of years. And the IRS is looking at tax returns from 2013 to 2017.
As I already reported, the IRS sent out three different letters. “If you got [the harshest] letter, the IRS thinks you are a crypto trader,” said Speiss.
Ignoring the letters would be unwise.
A taxpayer could amend his tax returns going back to 2013 and pay what he owes to get off the naughty list. And since bitcoin and other cryptocurrencies have been very volatile, taxpayers may also have had capital losses to report.
For those still on the naughty list, the IRS could also charge penalties and interest of up to 25 percent unless a deal is negotiated with the taxpayer.
Still don’t want to pay? The IRS could — as in any tax case — come after all the assets of virtual-currency traders and investors.
The price of virtual currencies has risen lately because some people (mostly those without common sense) are seeing them as safe havens during the current chaos in the world financial markets. They are also rising because some investors — especially those in China — are looking to move their money out of unstable economies.
You already know what I think.
If you hang onto virtual currencies long enough, you eventually won’t have profits to worry about because they are confidence games and the value will eventually go to zero.
But you will still owe taxes for the years you made money. The IRS isn’t too forgiving.