Own digital currency? Expect a letter from the IRS.

The Internal Revenue Service (IRS) recently announced it will send out 10,000 letters to those who own cryptocurrency. The agency’s communications are geared to help better ensure tax compliance. The problem: tax compliance regarding digital assets is unclear, at best.

What is the confusion?

Two main reasons. First, the country has just undergone the biggest change to the tax code in decades. The Tax Cuts and Jobs Act (TCJA) went into full effect this recent tax season, making 2018 tax filings more of a headache than usual.

Second, digital currency is a relatively novel concept. Governments are still trying to figure out how to account for cryptocurrencies like Bitcoins. In addition to figuring out the right way to tax this new form of currency, government officials still have trouble tracking digital currency. Technological advances and software are in the works to help ease this process, increasing the likelihood that the IRS and other agencies will keep a close lookout for those who fail to report.

Why is the IRS sending taxpayers letters?

The agency has chosen to send letters to crypto investors to encourage them to amend their tax filings or else face potential criminal charges.

Where did the IRS get this information?

As noted above, the agency has struggled to keep up with this new form of currency. This fact begs the question: How did the IRS find out about these alleged digital currency tax cheats? Skeptics state the IRS has just sent out a blanket campaign to anyone that showed up on a list of Coinbase users, regardless of whether they actually owed taxes on the holdings.

What does this mean for those who use digital currency?

This recent effort shows the government will likely expect those who use digital currency to report their assets and pay applicable taxes. A failure to do so could result in an audit and potential criminal charges.

This is a developing area of tax law. We will provide updates as they become available.