Digital currency, such as Bitcoin, has gained in popularity over recent years. As a result, the Internal Revenue Service (IRS) is scrambling to update tax rules and regulations to address this new form of currency. The federal agency was recently chastised twice by Congress for its handling of digital transactions. The concerns were voiced in two separate letters, sent within three weeks of each other.
Letter #1: Review these transactions wisely
The first letter focuses on a recent attempt by the IRS to review these transactions through the use of a “John Doe Summons.” This summons is essentially a court order that allows the federal agency to demand records of investors from a financial institution. In this case, the IRS is demanding information from Coinbase, a large financial institution that deals in digital currency
If successful, the summons would result in the review of over 500,000 individual’s records.
This letter from Congress calls the move unwise, in less kind words. More specifically, it states that move was “extremely burdensome” and “highly intrusive.”
Congressional leaders state that the transactions appear to involve sums of less than $10,000. This small amount, the letter continues, supports concerns that the IRS lacked a “reasonable basis” of tax compliance issues in the first place, further negating the need to intrude on these customers.
Letter #2: Provide clear guidance
While the first letter appears to favor taxpayers’ interests, the second clarifies that digital currency is subject to taxation. It calls for the IRS to provide clear guidance to better ensure businesses and individuals are clear on reporting requirements.
Overall lesson: Use digital currency wisely
Ultimately, those who are partaking in the virtual market should do so carefully. The IRS is keeping an eye on these transactions. If you are unsure of your obligations, it is wise to seek legal counsel to better ensure compliance.