The Internal Revenue Service has a message it wants to get out to recreational bitcoin investors who think they can dodge taxes on their cryptocurrency gains — it knows what’s going on, and people won’t be able to get away with it for long.
Gary Alford, the IRS special agent who gained national attention for helping solve the Silk Road online drug trafficking case that led to the 2013 arrest of kingpin Ross Ulbricht, spoke at a panel in New York hosted by global accounting firm EisnerAmper about the tax consequences of cryptocurrencies. Now a cyber-crime coordinator for the IRS, Alford said his agency is ready to start moving past sensational money laundering cases and into more routine enforcements of tax law involving cryptocurrencies.
Speaking from a seat in front of a luxurious fireplace at the Columbus Citizens Foundation townhouse on Manhattan’s Upper East Side, Alford said:
“We’re usually behind the curve — history is made and then we react to it. But in this case, we are ahead of the curve. We were there on ground zero, and we were waiting for the rest of the world to catch up to what we already knew... We already are aware that there were cases to be made, we just didn’t know if we were at the point where we can bring it for criminal prosecution. We believe we are at that point now. If we had 12 jurors and told them someone made all their money in bitcoin, we believe that they would understand.”
Gary Alford
Alford, EisnerAmper tax partner Walter Pagano and moderator Dara Albright, a digital finance consultant, clarified existing regulations and discussed what the IRS still needs to resolve when it releases new guidance for cryptocurrencies in late June or July. Pagano said one of the biggest questions that has emerged since the IRS last released guidance in the space in March 2014 is how to deal with cost basis when a hard fork occurs, like when bitcoin cash split from bitcoin in 2017.
For now, Pagano urged the financial advisors in the audience to ask clients about cryptocurrency gains if they aren’t already doing so, because those profits can generally be taxed in the same way capital gains on stock investments are taxed.
“The basic concept is that in the bitcoin world, cryptocurrencies — they’re not really currencies, they’re property,” Pagano says. “The word has been out for many, many years now that virtual currency transactions generally are taxable. The one time that we can really say with clarity that there’s no taxable event is when a person first buys virtual currency with fiat, with a U.S. dollar. That’s merely a purchase, but what happens after that becomes very complex.”
Earlier this week, Bitwise global head of research Matt Hougan published an article about how cryptocurrency is similar and different to more traditional investments like gold, oil and good old-fashioned currency. Although the law requires cryptocurrency investors to report gains, not many comply. Alford cited an IRS summons to Coinbase in November 2017 that showed “more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year," but only about 800 taxpayers reported gains.
The IRS is trying to get that number closer to reality by doing outreach events like EisnerAmper’s panel and urging voluntary compliance, but Alford warned that if the IRS can prove that a taxpayer willfully concealed cryptocurrency gains, they might be subject to prosecution. Ignorance of the law is not a good enough excuse, he says, especially if there are records that they kept a spreadsheet of their investments or discussed cryptocurrencies with their accountant.
“You might have bitcoin on everything, but when you go to your accountant, you say, ‘Oh, I’ve never heard of bitcoin.’ Really? Every date you’ve ever been on, that’s all you talked about was bitcoin, but somehow when your accountant asks you, you forgot to talk about it?” Alford says. “That’s our burden to show this individual knew.”
Introducing Forbes Blockchain 50: Learn about the companies investing in the tech that will speed up business processes, increase transparency and potentially save billions of dollars.