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Form 1040 may look similar to last year’s return, but there’s one key difference that’s attracting attention: a question about cryptocurrency.

As I reported late last year, early drafts of Form 1040 reflected a new question on the top of Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040.

The new question made it onto the final version of Schedule 1:

The question asks: At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? 

The placement of the question is important. I believe the question is intended to be so conspicuous that it makes it difficult for any taxpayer to argue that they didn’t know that it was necessary to report cryptocurrency transactions.

The Internal Revenue Service (IRS) has made no secret of the fact that it believes that taxpayers are not properly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, the IRS processed, on average, just under 150 million individual returns annually. Of those, approximately 84% were filed electronically. When IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

But… so what? If you skip over the question or answer it wrong, you can still claim that you made a mistake, right?

Here’s the thing. Even though the question is new, this kind of question certainly isn’t. Tax professionals have watched taxpayers struggle before when answering a similar question about offshore accounts and interests at the bottom of Schedule B. This one:

The IRS can and has taken the position that willfully failing to check the box related to offshores accounts and interests on Schedule B can form the basis for criminal prosecution. Failing to check the box by accident can still result in expensive headaches and draconian penalties. I fully expect a similar result when it comes to cryptocurrency.

So why all the fuss over this new question? The IRS has made cryptocurrency compliance a priority. Last year, the IRS mailed letters to more than 10,000 taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not accurately report their transactions. This wasn’t unexpected since the IRS campaigns announced in 2018 that they were making noncompliance related to the use of virtual currency one of their targeted compliance campaigns.

In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency like Bitcoin and Ethereum will be treated as capital assets, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to gains or losses. (You can read more on the taxation of cryptocurrencies here.)

It’s clear that the IRS is getting serious about cryptocurrency reporting. If you have questions about how and what to report, don’t stay silent: ask your tax professional for more information.

Looking to reduce your taxable income with a donation of virtual currency to charity? The Internal Revenue Service (IRS) has issued guidance for donors (and charities) on the FAQ page of its website.

The IRS addressed whether gifting virtual currency to a charity could result in income, gain, or loss. The IRS confirmed that if you donate virtual currency to a charitable organization, you will not recognize income, gain, or loss from the donation. That’s the same result as giving stock or other appreciated assets, which are also characterized as capital assets.

The IRS also explained how to calculate the value of a gift of virtual currency to a charity. It’s fairly simple: your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation. That’s only true, however, if you have held the virtual currency for more than one year. If you have kept the virtual currency for one year or less, your deduction is the less of your basis (cost plus adjustments) in the virtual currency or its fair market value at the time of the contribution.

The IRS also addressed the charity’s responsibilities for gifts of virtual currency (you’ll see those answers at 35 and 36 of the FAQ). We all know that keeping records is super important for charities and donors. Typically, a charitable organization should provide a contemporaneous written acknowledgment for donations of more than $250; that remains true for virtual currency donations. And, the rules don’t change at higher dollar levels. A charitable organization is generally required to sign a donor’s Form 8283, Non-cash Charitable Contributions, acknowledging receipt of the property if the donor is claiming a deduction of more than $5,000; that’s still true for gifts of virtual currency. The signature confirms the date and receipt of the property and is not a confirmation of the value of the contributed property (that remains the responsibility of the donor).

What about the charity’s reporting requirements to the IRS? A charitable organization that receives virtual currency should treat the donation as a non-cash contribution. Those are reported on a Form 990-series annual return. Also, charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property – and that includes the sale of virtual currency for real currency – within three years after the date they initially received the property. The donor also gets a copy of the form.

The IRS previously issued guidance in 2014 to taxpayers, making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. (You can read more on the taxation of cryptocurrencies like Bitcoin here.)

It’s deja vu all over again as the Internal Revenue Service (IRS) is seeking to access customer data from Bitstamp. As with the Coinbase case, a taxpayer balked at the data sharing and filed suit to stop it. And just like the Coinbase case, the IRS won in part and lost in part.

Bitstamp describes itself as “a European based cryptocurrency marketplace.” It’s based in Luxembourg but runs a United States office out of New York City. The marketplace allows people from all around the world to buy and sell cryptocurrencies like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and XRP (Ripple).

According to court documents, William Zietzke self-prepared his 2016 tax return using Turbo Tax. He reported long-term capital gains of $104,482 as a result of Bitcoin transactions that he said took place in 2016. He eventually hired a Certified Public Accountant (CPA); the CPA amended his returns and reduced the long-term capital gains in 2016 from $104,482 to $410, which should have resulted in a $15,475 refund.

Zietzke was audited and he told the Revenue Officer that he had two separate groups of Bitcoin holdings. The first group was managed through Armory wallet software, and the second was held in wallets hosted by Coinbase and Purse.io. He did not mention Bitstamp, and the Revenue Officer found at least one transaction through Bitstamp while reviewing the taxpayer’s records.

In June of 2019, the Revenue Officer issued a third-party summons to Bitstamp. A third-party summons is typically issued when the IRS has reason to believe that another party, like a bank or an employer, has information that a taxpayer has not made available.

Here’s where things get tricky. The summons notes that the tax year in question is 2016. However, the summons, which asks Bitstamp to provide all records related to the taxpayer, does not appear to limit the request to the tax year 2016.

The Revenue Officer also asked Zietzke to turn over all documents related to all of his crypto holdings, including any tied to wallets hosted by Coinbase, Bitstamp, BTC-e, and purse.io. However, the request made to Zietzke specifically limited the scope to the tax year 2016. 

Zietzke argued that the summons was overbroad. Not surprisingly, he relied on the Coinbase case. He also noted that the IRS had requested information from Bitstamp (like account opening and application records) that went beyond the scope of what the courts allowed in the Coinbase case.

Zietzke sought to quash the summons entirely, or in the alternative, limit the scope. Quash is a legal term that means to set aside or cancel.

Writing for the United States District Court, Judge John C. Coughenour denied Zietzke’s petition. But it wasn’t a complete loss. Judge Coughenour did find the summons overbroad and required the IRS to file a proposed amended summons that complied with his court order.

Judge Coughenour agreed that the IRS has an interest in determining how many Bitcoin transactions Zietzke engaged in for the tax year in question (2016). However, the request, as written, would require Bitstamp to produce information relating to Bitcoin sales before 2016—even though those transactions could not impact Zietzke’s gain or loss if he sold Bitcoins in 2016. That, the court found, is overbroad.

The IRS was ordered to amend the summons so that the demand for information relates only to Zietzke’s 2016 transactions. Bowing to basis issues, the court found that the requests may ask for information before 2016 only to the extent that it is relevant to determining the tax implications of transactions in 2016. 

After the IRS has prepared a proposed summons, Zietzke gets another bite at the apple and can appeal. The case is Zietzke v. United States of America (2:19-cv-01234).

Bitstamp does not appear to have addressed the matter on its website. I can’t find any mention of it in the news section of the website, and if you type in “tax” in the search box, there aren’t any results.

But don’t expect this to be the last word. Earlier this year, the IRS has announced that they were sending letters to approximately 10,000 taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. Compliance from taxpayers using virtual currency is one of five IRS campaigns announced last year. And this year, the IRS issued new guidance for taxpayers who engage in transactions involving virtual currency, including cryptocurrency, the first in five years. You can bet there’s more to come.

Taxpayer asks:

I paid short term and long term capital gains on my Bitcoin when I moved it from Coinbase into my hardwallet. Do you see any reason I should have to pay more taxes again when I spend some of these same Bitcoins from my hardwallet? Thanks.

Taxgirl says:

This is a great question. Guidance on the tax treatment of cryptocurrency has been limited (and late in coming), so there’s still a lot of confusion.

Some background might be helpful. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. 

That means, generally:

  • For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. That’s true, as well, when it comes to basis, holding period and a triggering (taxable) event.
  • For those treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may also result in a gain or a loss.

In your case, the trick is to figure the triggering (taxable) event. A taxable event is typically a sale or disposition of an asset. When it comes to cryptocurrency, a taxable event typically occurs whenever the crypto is traded for cash or other crypto or whenever the crypto is used to purchase goods or services.

It’s also true that cashing cryptocurrency out of an exchange or similar platform may be treated as a sale – even if you’re forced to withdraw it. It sounds like that’s what you did. You moved Bitcoin from one platform to another and paid the resulting tax on the gain. 

But you’re not done yet. When you spend your Bitcoin, you may be subject to tax again. That’s because you’ve experienced another triggering (taxable) event. The good news is that your basis will be adjusted accordingly.

Here’s an example.

Let’s say that you bought Bitcoin for $100, and when you moved it, it was worth $300. The gain was $200, and you paid tax on the gain.

Let’s assume that your Bitcoin are worth $350 when you’re ready to spend it. You will pay capital gains tax again – but using a new basis based on the value of the move from your last transaction.

So, in the first instance, it’s $300 (move price) – $100 (original cost) = $200 of gain. In the second instance, it’s $350 (value at the time you spent it) – $300 (new basis) = $50 of gain. All totaled, you have $250 in gain spread out over time. It’s the same result as though you held onto it for the entire time: $350 (value at the time you spent it) – $100 (original cost) = $250.

But what if it had gone south? Let’s say it was only worth $150 when you spent it. Then:

$150 (value at the time you spent it) – $300 (new basis) = -150 (you have loss).

You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

Capital gains tax rates are generally favorable.

Capital gains rates for long term gains (those held more than a year) range from 0% to 20% while short-term capital gains are taxed as ordinary income.

You’ll report all of your realized gains and losses on Schedule D. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value changes, if there’s no sale or disposition, there’s nothing to report.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Last year, Ohio made news as the first state in the nation to accept tax payments using cryptocurrency. Less than a year later, the program has been suspended after accusations that it wasn’t properly vetted.

The program was initially hailed as a model for the rest of the country. Under the terms of the program, if you operated a business in the State of Ohio, you could register at OhioCrypto.com to pay your taxes. The cryptocurrency payments were processed by a third-party payment processor, BitPay, and immediately converted to dollars before being deposited into a state account. 

(You can read more about the program here.)

That system, according to a new opinion from State Attorney General Dave Yost, was part of a number of potential failings with the program, including a failure to bid it out.

Today, the website at OhioCrypto.com remains shuttered. A notice advises:

It reads: 

OhioCrypto is currently suspended. More information can be found by clicking here. If you have questions, please email OhioCrypto@tos.ohio.gov.

Clicking through leads you to back to the Treasurer’s Office’s site, which offers further details on the takedown.

The program was touted as a game-changer by former Treasurer Josh Mandel. Mandel was elected Ohio Treasurer in 2010. He ran an unsuccessful Congressional campaign against Senator Sherrod Brown in 2012. He was re-elected as Treasurer in 2014 and made plans to again challenge Brown in 2018. He abruptly pulled out of that race last year and left the Treasurer’s office after his term ended in January 2019.

His successor, Robert Sprague, asked the Ohio Attorney General for a formal opinion on whether the payment method facilitated by the program’s third-party processor constitutes a “financial transaction device” under Ohio law. If it did, then by law (Ohio Revised Code §113.40), the contract for the processor must go through a formal procedure that includes approval from state officials and a request for bids from at least three financial institutions. 

The Attorney General did take a look at the program. He found that OhioCrypto.com met the legal definition of a “financial transaction device.” Yost also found that the use of the program was not permitted, claiming that existing state law doesn’t extend to OhioCrypto.com. Yost said the process was basically akin to a currency exchange, finding, “The Treasurer’s use of a payment processor to convert cryptocurrency into dollars for the payment of taxes is not authorized, expressly or impliedly, by statutes allowing the receipt of electronic payments.”

(To read Yost’s opinion, which downloads as a PDF, click here.)

Sprague said, about the findings, “It is vital that Ohio explores innovative, new technologies and processes that continue to drive Ohio into the future. However, we must make sure any new processes that are implemented, such as OhioCrypto.com, are established in accordance with Ohio law.”

Sprague also noted that the program had not been popular: The state accepted fewer than ten payments.

Mandel has not commented on the suspension of the program. Earlier this year, without comment, Mandel deleted all posts on his Twitter and Facebook accounts. He also set his Twitter account to private. 

The largest dark web child pornography site in the world has been taken down. That was the word today from the U.S. Attorney’s Office for the District of Columbia, the Justice Department’s Criminal Division, the IRS Criminal Investigation (IRS-CI), and U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI), together with the National Crime Agency of the United Kingdom and Republic of Korea at a joint press conference announcing arrests and forfeitures. 

According to the IRS-CI, agents became aware of Welcome to Video, the largest child sexual exploitation market by volume of content, because of their work on previous dark web marketplaces. The dark web, also referred to as “Darknet,” refers to content that you don’t typically access through regular internet browsing activities.

IRS-CI was able to trace bitcoin transactions on the site to people all over the world who were uploading and downloading this material, as well as find the location of the site administrator. By analyzing the blockchain and de-anonymizing bitcoin transactions, the agency was able to identify hundreds of predators around the world – even though those users thought that they could remain anonymous.

As a result of the investigations, Jong Woo Son, 23, a South Korean national, was indicted by a federal grand jury in the District of Columbia for operating the site. Son has also been charged and convicted in South Korea and is currently in custody in South Korea. The operation resulted in the seizure of approximately 7.5 terabytes of child pornography videos, the largest of its kind: that’s more than 10,000 CDs full of imagery that are no longer in the hands of child pornographers. The images, which are being analyzed by the National Center for Missing and Exploited Children (NCMEC), contained over 250,000 unique videos; 45% of the videos contain images that have not been previously known to exist.

According to the indictment, on March 5, 2018, agents from the IRS-CI, HSI, National Crime Agency in the United Kingdom, and Korean National Police in South Korea arrested Son and seized the server that he used to operate a Darknet market which advertised child sexual exploitation videos. The site, Welcome To Video, offered these videos for sale using the cryptocurrency bitcoin: the site boasted over one million downloads of child exploitation videos by users.

The website is among the first of its kind to monetize child exploitation videos using bitcoin. Here’s how it worked: each user received a unique bitcoin address when the user created an account on the website. Those accounts could be used to pay to download the videos. An analysis of the server revealed that the website had more than one million bitcoin addresses, signifying that the website had the capacity for at least one million users.  

The data from the seized server was shared with law enforcement agencies around the world. This has resulted in leads sent to 38 countries. In addition to Son, 337 site users residing in 23 states (Alabama, Arkansas, California, Connecticut, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Virginia, and Washington State) and Washington, D.C. ,as well as the United Kingdom, South Korea, Germany, Saudi Arabia, the United Arab Emirates, the Czech Republic, Canada, Ireland, Spain, Brazil and Australia have been arrested and charged. Two users of the Darknet market committed suicide after the execution of search warrants.

The complaint alleges that law enforcement was able to trace payments of bitcoin to the Darknet site by following the flow of funds on the blockchain. The virtual currency accounts identified in the complaint were allegedly used by 24 individuals in five countries to fund the website and promote the exploitation of children. An unsealed forfeiture complaint seeks to recover these funds as part of efforts to assist victims of the crime.

In addition to arrests and seizures, the operation is also responsible for the rescue of at least 23 minor victims residing in the United States, Spain, and the United Kingdom, who were being actively abused by the users of the site.

“Children around the world are safer because of the actions taken by U.S. and foreign law enforcement to prosecute this case and recover funds for victims,” said U.S. Attorney Jessie K. Liu. “We will continue to pursue such criminals on and off the Darknet in the United States and abroad, to ensure they receive the punishment their terrible crimes deserve.”

“Through the sophisticated tracing of bitcoin transactions, IRS-CI special agents were able to determine the location of the Darknet server, identify the administrator of the website and ultimately track down the website server’s physical location in South Korea,” said IRS-CI Chief Don Fort. “This large-scale criminal enterprise that endangered the safety of children around the world is no more.”

Chief Fort noted that some might call it an odd pairing for the IRS to work on this type of investigation. But, he explained, “our unique and singular focus in following the money made this a logical next step after playing key roles in dismantling Silk Road, BTC-E, Mt Gox and other crimes perpetrated in the shadows of the dark web.”

He further explained, “Our agency’s ability to analyze the blockchain and de-anonymize bitcoin transactions allowed for the identification of hundreds of predators around the world.”

Whether the funds are fiat or virtual, Chief Fort said, “IRS-CI’s expertise is in tracing money all around the world.” Today, IRS-CI is the only federal agency that devotes 100% of resources to investigating financial crimes. IRS-CI is also the only agency with jurisdiction over federal tax crimes. (For more about IRS-CI, click here.)

Chief Fort had an additional message for criminals around the world. “You used to hide by laundering your money through shell companies around the country, but we traced you. You took your money offshore and hid around the world, but we found you. You went on the dark web thinking that your actions were anonymous, but they weren’t, and we again found you. You now deal in crypto-currency, again thinking this will make you anonymous, but our agents have once again proved that there is nowhere you can hide.” He added, “We will not stop in our pursuit.”

Days after the Internal Revenue Service (IRS) released two new pieces of guidance for taxpayers who engage in transactions involving virtual currency, the IRS announced another compliance measure: a checkbox on form 1040. The checkbox, which appears on the early release draft of the form 1040, asks taxpayers about financial interests in virtual currency.

The checkbox appears on the second early release draft of the 2019 Form 1040, Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). The checkbox is at the top of Schedule 1, which is used for reporting income or adjustments to income that can’t be entered directly on the front page of form 1040:

1040 crypto question

The question is:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?  

If you’re wondering why that sounds familiar, the wording closely parallels the verbiage on Schedule B, Part III, concerning offshore accounts. That question appears at the bottom of the Schedule. It asks:

At any time during 2018, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? 

The similarities aren’t surprising. You may recall that I’ve suggested before that the strategy the IRS is using to pursue cryptocurrency is reminiscent of how the agency chased down offshore accounts.

However, I’m not overly keen on the location of the cryptocurrency question. As noted, taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 should check the appropriate box to answer the virtual currency question. But taxpayers who don’t have to file Schedule 1 for any other purpose may not be aware that they need to file Schedule 1 to answer to this question if it applies to them. Yes, tax software interviews will likely catch it – but what if they don’t? Or what if taxpayers are completing the form by hand? Or if tax preparers don’t think to ask? 

I think it’s something that IRS will need to address. The IRS will accept Schedule 1 comments via email at WI.1040.Comments@IRS.gov for a 30-day comment period beginning October 11, 2019. The IRS cannot respond individually to each comment received, but all feedback will be considered.

Why does the location of the checkbox matter? Compliance. The checkbox is ostensibly on the form to remind taxpayers to report their cryptocurrency transactions. But those tax professionals like me who have seen the response to the checkbox on Schedule B know that this is also an easy way to hold those who don’t check the box – even by accident – accountable. The IRS can and has taken the position that willfully failing to check the box related to offshores interests can form the basis for criminal prosecution. Failing to check the box by accident can still result in headaches and penalties. I fully expect a similar result on the cryptocurrency side.

If you’re looking for more information on cryptocurrency, you can read more about the recent guidance here. You can find out more about the taxation of cryptocurrencies like Bitcoin here. And you can get up to date about how the IRS is targeting non-compliance through a variety of efforts, ranging from taxpayer education to audits to criminal investigations here.

The United States may be taking a hard line on cryptocurrency, but not all countries are seeking to collect from the virtual currency boom. The Portuguese Tax & Customs Authority (PTA) has announced that buying or selling cryptocurrency in Portugal is tax-free. 

The announcement came at the same time that the Internal Revenue Service (IRS) has announced a crackdown on cryptocurrency (more on that here). However, Portugal has taken the opposite tack: it made clear that buying or selling cryptocurrencies would not be subject to capital gain taxes or value-added tax (VAT). The PTA previously clarified in 2016 (downloads in Portuguese as a PDF) that buying or selling cryptocurrency in Portugal would not be considered a taxable event which means that it’s not subject to tax. There are exceptions: the receipt of cryptocurrency in exchange for goods or services doesn’t change the tax treatment of the original transaction, and taxpayers who deal in cryptocurrency as a professional or business activity are still subject to some taxes.

A VAT is similar to a sales tax, but not quite the same thing. A sales tax is a tax typically tacked onto the end of a sale of goods or services, much like state and local sales taxes are imposed. A value-added tax is a consumption tax but, unlike a sales tax, it’s collected at every stage along the production chain. (You can read more about VAT here.)

The news was first reported in a local paper, Jornal de Negócios. The paper reviewed an official document (in Portuguese, downloads as a PDF) from the PTA in response to a company that planned to mine cryptocurrency. The tax agency cited Article 135 (1)(e) of Council Directive 2006/112/EC (downloads as a PDF) which exempts “transactions, including negotiation, concerning currency, banknotes, and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or L 347/28 EN Official Journal of the European Union 11.12.2006 other metal coins or banknotes which are not normally used as legal tender or coins of numismatic interest” from VAT.

That means that Portugal will treat cryptocurrency as a form of currency, making it exempt from VAT and capital gains. That’s consistent with its policy on other currencies: Portugal does not tax the gain on the value or sale of any currency.

Not all European Union (EU) countries completely agree with Portugal. For example, the PTA cited a Swedish court case, Skatteverker (Administração Fiscal Sueca) v. David Hedqvist, in which the court ruled that trading cryptocurrency was not subject to VAT. However, the Swedish Tax Administration appealed that decision and it eventually advanced to the European Court of Justice (ECJ) where it was upheld. Other EU countries have taken various positions on the taxation of cryptocurrency depending on how it was obtained and how it was used.

The U.S. has, since 2014, consistently treated cryptocurrency as a capital asset if it can be converted into cash. This means that capital gains rules apply to any gains or losses. (You can read more on the taxation of cryptocurrencies like Bitcoin according to the IRS here.)

With the announcement, Portugal has made it clear that it is – at least for now – a tax-friendly home for those who buy and sell cryptocurrency. But don’t pack your bags just yet: Remember that U.S. citizens are taxed on their worldwide income, meaning that a trip across the pond won’t be enough to slash your tax bill.

Taxpayers who deal – or even dabble – in virtual currency may be on the receiving end of a letter from the Internal Revenue Service (IRS) this month. The IRS has announced that they have begun sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.

The IRS started sending letters to taxpayers last week. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

(For more on some of those efforts – like the Coinbase court saga – click here.)

There are three variations on the letter: letter 6173, letter 6174, or letter 6174-A. The letters are allegedly targeted to taxpayers depending on the information available to the IRS. According to the IRS, “[a]ll three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.” However, all three versions are not the same; one version alleges noncompliance while another merely indicates that the IRS has been made aware of cryptocurrency activity attached to the taxpayer.

Depending on the version of the letter you receive, your next steps may vary. But if you’re one of the more than 10,000 taxpayers expected to receive a letter by the end of August, don’t ignore the IRS.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

This campaign is not one of the six compliance campaigns for taxpayers announced earlier this month. It is, however, one of the IRS campaigns announced last year to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers.

A compliance campaign is a targeted directive on a particular issue; they happen when the IRS determines that there are taxpayer issues that require a response from the agency. When the IRS announces a campaign (or campaigns), it’s a signal that they will be dedicating time, resources, training, and tools towards a tax compliance goal. To date, the IRS has announced a total of 59 campaigns.

(You can read more about the most recently announced compliance campaigns here.)

In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF) making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. (You can read more on the taxation of cryptocurrencies like Bitcoin here.)

However, two years later, in 2016, only 802 individual tax returns out of the 132 million filed electronically with the IRS reported income related to cryptocurrencies. The government is clearly seeking to increase compliance.

According to the IRS, the agency will continue to follow-up on cryptocurrency compliance through a variety of efforts, ranging from taxpayer education to audits to criminal investigations. The IRS has also warned that taxpayers who do not properly report can be liable for tax, penalties, and interest; in some cases, taxpayers could be subject to criminal prosecution.

If all of this sounds familiar, you’re not mistaken. There are clear parallels between the IRS’ focus on cryptocurrency and the prior targeting of offshore accounts. Investigations into offshore accounts began with subpoenas to financial institutions and eventually became a full-fledged IRS compliance initiative. Unlike offshore account disclosure, however, the IRS has signaled that it will not offer an amnesty program (it’s worth noting that many tax professionals question whether that will stick).

The issuance of these cryptocurrency “educational” letters is intended to be a warning shot to taxpayers. The IRS says to expect additional legal guidance in this area in the near future.

By now, most taxpayers understand that there are tax consequences associated with cryptocurrency, but ironically, until recently you couldn’t pay those taxes using cryptocurrency. That’s about to change: With the launch of OhioCrypto.com, Ohio will become the first state in the nation to accept tax payments using cryptocurrency.

“We are proud to make Ohio the first state in the nation to accept tax payments via cryptocurrency,” said Ohio Treasurer Josh Mandel. “We’re doing this to provide Ohioans more options and ease in paying their taxes and also to project Ohio’s leadership in embracing blockchain technology.”

Under the new payment system, not all taxpayers can make payment in cryptocurrency: It’s limited to businesses operating in Ohio. Offering the service to individual taxpayers is on the agenda, but Mandel hasn’t indicated any specific timeframe for the expansion.

Here’s how it works: If you operate a business in the State of Ohio and you have a tax bill, you can register online at OhioCrypto.com to pay your taxes. You can make payments on any of 23 eligible business-related taxes (you can find a list here), and there is no transaction limit.

The Treasurer’s office isn’t holding, mining or investing in cryptocurrency for payments or processing. All cryptocurrency payments are processed by a third-party cryptocurrency payment processor, BitPay. Those payments are immediately converted to dollars before being deposited into a state account.

“The State of Ohio is the first major government entity offering its citizens the option to pay with cryptocurrency,” said Stephen Pair, cofounder and CEO of BitPay. “With BitPay, Ohio can leverage blockchain technology and benefit from reduced risk and identity fraud as well as enabling quick and easy payments from any device anywhere in the world and get paid in dollars. This vision is at the forefront of moving blockchain payments into mainstream adoption.”

You’ll need to use Payment Protocol-compatible wallets to pay. Those include BitPay Wallet; Copay Wallet; BTC.com Wallet; Mycelium Wallet; Edge Wallet (formerly Airbitz); Electrum Wallet; Bitcoin Core Wallet; Bitcoin.com Wallet; BRD Wallet (breadwallet); and Bitcoin Cash (BCH) Wallets. If you don’t have one of these wallets, OhioCrypto.com advises you to create one and send some coin to it.

Currently, the Treasurer’s office only accepts Bitcoin for payment, but the plan is to add other cryptocurrencies in the future.

There is a cost associated with paying in cryptocurrency (it’s worth noting taxpayers who pay via credit cards or debit cards are also subject to fees from payment providers but are not assessed fees through the Treasurer’s office). Taxpayers paying using cryptocurrency are charged a transaction fee, network fee, and a miner fee. The miner fee will be displayed in the taxpayer’s wallet and not on OhioCrypto.com. The transaction fee will be 0% during an initial three-month introductory period, and after that time, it will be 1%. Fees are user fees and are not supplemented by state funds.

According to the Treasurer’s Office, “The State of Ohio will not pay Bitpay or any other company fees for processing or other services relating to the acceptance of crypto.”

It will be interesting to see if other state governments follow suit. A bill to accept bitcoin as payment for taxes was ultimately voted down, 264 to 74, by the New Hampshire legislature in 2016. A similar measure in Utah also failed to pass, while a bill to accept crypto for payments in Georgia stalled earlier this year. However, states are still trying: Arizona’s state legislature actually passed a crypto payment measure, but it was vetoed on May 16, 2018.

The Internal Revenue Service (IRS) doesn’t currently accept cryptocurrency as payment either. By law, the IRS issues Regulations (interpretations of the tax code) and other guidance about the kinds of payment which can be used to pay taxes. The IRS has authorized payment by check, money order, credit card and debit card—but not by Bitcoin or other cryptocurrency. (You can find more ways to pay your IRS tax bill here.)

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