[2019-07-26] The IRS is warning thousands of cryptocurrency holders to pay taxes

[o_e_l_e_o]

I have heard that US citizens need to report each and every cryptocurrency transaction made by them in the income tax return, as per the directive from the IRS.

Correct. The form in question is Form 8949, which you can view here - https://www.irs.gov/pub/irs-pdf/f8949.pdf - unless you have a 1099-B from your exchange(s) which is unlikely. Every trade you make, even if trading bitcoin for an altcoin or vice versa, needs to have a cost basis worked out in USD and reported on this form.

Now how many out of 50 million could have done this? I strongly suspect that a majority of the low volume users might have ignored this directive.

I agree. Further, given the number of exchanges which have scammed, been hacked in to insolvency, shut down, etc., not only will many people not have done this, but many people will be unable to do this retrospectively as they did not keep their own records and can no longer access their exchange's records.

And I don't think that the IRS will go after them for $100 or $200 in pending taxes.

Who knows for sure, but if they find out you have a KYCed account on a bitcoin exchange and you have never paid taxes related to bitcoin, then expect to be investigated.

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[bryant.coleman]

I agree. Further, given the number of exchanges which have scammed, been hacked in to insolvency, shut down, etc., not only will many people not have done this, but many people will be unable to do this retrospectively as they did not keep their own records and can no longer access their exchange's records.

Now this is very interesting. If someone had an account in BTC-e/Wex.nz or Cryptopia, then how is he supposed to list the details of all the cryptocurrency transactions he made using these platforms? How the IRS is going to react in such a situation? Thankfully I am not a citizen of the United States. I had accounts with at least half a dozen exchanges (all of them KYCed) and 2-3 of these exchanges doesn't exist anymore. And in my country, I haven't yet heard from anyone that the authorities are targeting cryptocurrency users. 

[PrimeNumber7]

They have no reason to go after 50 million people when 99%+ of these people properly reported their income.

I assume there are no actual public data for this, but I would be very surprised if only less than 1% of US citizens had not properly reported their cryptocurrency gains or losses. I suspect the real figure is much higher, which is why the IRS are pushing exchanges to hand over the info. If it were only a handful of users, then their resources would be better spent elsewhere, like going after bankers who abuse loopholes to avoid tax (HA! Like they are ever going to do that.) I also suspect that if the number were really this low, the IRS wouldn't be putting the cryptocurrency question right on the front page of the 1040 and forcing literally everyone in the country to answer it.

I have heard that US citizens need to report each and every cryptocurrency transaction made by them in the income tax return, as per the directive from the IRS. Now how many out of 50 million could have done this? I strongly suspect that a majority of the low volume users might have ignored this directive. And I don't think that the IRS will go after them for $100 or $200 in pending taxes. But they are moving very slowly. Only around 10,000 have been sent the notice till now. 10K out of 50 million... And out of that 10K, I assume a majority would be letter 6174.

I don’t think the IRS is going to go after taxpayers who owe $200 in unpaid taxes in masse, although they may go after a small number of them in order to make a statement.

My advice is to pay your taxes according to the law.

[o_e_l_e_o]

If someone had an account in BTC-e/Wex.nz or Cryptopia, then how is he supposed to list the details of all the cryptocurrency transactions he made using these platforms?

The IRS will expect that you have kept full records of all your transactions, including between fiat and crypto and between crypto and crypto. If you don't have these records, then you will need to report your trades as accurately as you can, which would include contacting the exchange in question and requesting your transaction records if possible. If you have no records at all, and the exchange no longer exists to provide those records,  then I suppose your only option would be to figure out what you deposited to the exchange and what you ultimately withdrew, and calculate the difference as your capital gains. If you can't even figure out that, then I assume you would have to assume a cost basis of zero on whatever you are holding.

Having said all that, I am not a tax professional and have never been in this situation given that I do not use any centralized exchanges, so if being audited by the IRS (or your country's equivalent) is a concern of yours, then you should take professional advice.

[bryant.coleman]

If someone had an account in BTC-e/Wex.nz or Cryptopia, then how is he supposed to list the details of all the cryptocurrency transactions he made using these platforms?

The IRS will expect that you have kept full records of all your transactions, including between fiat and crypto and between crypto and crypto. If you don't have these records, then you will need to report your trades as accurately as you can, which would include contacting the exchange in question and requesting your transaction records if possible. If you have no records at all, and the exchange no longer exists to provide those records,  then I suppose your only option would be to figure out what you deposited to the exchange and what you ultimately withdrew, and calculate the difference as your capital gains. If you can't even figure out that, then I assume you would have to assume a cost basis of zero on whatever you are holding.

Having said all that, I am not a tax professional and have never been in this situation given that I do not use any centralized exchanges, so if being audited by the IRS (or your country's equivalent) is a concern of yours, then you should take professional advice.

If such a situation arises, then obviously I need to consult a CA. The last time I used a centralized exchange was in 2018. After that I realized the dangers of using their services. For the past 3 years I am mostly using DEX and P2P platforms. But what was done earlier can't be undone now. In case the tax department digs out all those past transactions, then I guess I will be in trouble. The amounts involved are not that large, but still it will be better to be prepared.