The IRS Is Coming! The IRS is Coming!

As first reported by Bob McKenzie this morning, the IRS has purchased software to help them identify Bitcoin transactions. The IRS is reportedly using a product from Chainalysis, Inc., a New York-based supplier of products used to analyze Bitcoin activity.

The Daily Beast notes that “The purpose of this acquisition [by the IRS] is…to help us trace the movement of money through the bitcoin economy.” Chainalysis’s products appear to include features that can locate specific Bitcoin users and anyone connected to that user.

Government may be slow in acting, but it’s clear the IRS and other federal law enforcement agencies are very interested in Bitcoins. As noted in a previous post, IRS records show that only 802 individuals included Bitcoins on their 2015 returns. The IRS has issued a summons to Coinbase (this is currently in litigation); I expect further IRS enforcement activity against both domestic and international wallets. And I doubt the IRS’s interest will stop at Bitcoins; other cryptocurrencies will be examined, too. I’m also aware of other federal law enforcement agencies investigating Bitcoin users.

If you’ve been including your Bitcoin sales on your tax return, you can (generally) ignore this kerfuffle. Your taxes are correct, you’re following the law, so there’s not much for you to directly worry about from a tax standpoint. However, if you’ve been thinking, “No 1099, no reporting,” think again. And if you’re acting as an active seller, now is an excellent time to make sure you’re in compliance with money transmittal business laws (on both the state and federal level) and tax law. It’s very clear that the IRS is coming on the Bitcoin front.

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