Ride the Lightning

The IRS Wants to Know What’s In Your Bitcoin Wallet

September 7, 2017

And that's not good news for the majority of Bitcoin users, who notoriously do not report income to the IRS. As Naked Security reported on August 31^st, Bitcoin, the best-known cryptocurrency, is widely used in the criminal underworld since users can remain largely anonymous. However, besides the fact that the IRS demands that you pay your taxes on all income, including illegal income, it is going after those whose earnings may be totally legitimate but who also want to keep it all.

The IRS has had a contract since 2015 with Chainalysis, a New York-based company that markets a "Reactor" tool to track and analyze the movement of Bitcoin transactions. The goal of the agency is obvious – to "follow the money" as it moves from wallet to wallet, and eventually to an exchange where the owner cashes out in dollars or another fiat currency.

The gap between number of people dealing in Bitcoin and the number declaring income from it is wide – very, very wide. The IRS said in court documents that between 2013 and 2015, fewer than 900 people per year reported income on Form 8949, which is used to account for "a property description likely related to Bitcoin". That compares pathetically to the number of people using Coinbase – "the largest exchanger in the US of Bitcoin into US dollars," according to the government – with 4.8m users and 10.6m wallets.

And, as we all know, people have been investing in Bitcoin – and reaping huge profits.

The Department of Justice filed an ex parte petition last November in U.S. District Court in California seeking authorization for the IRS to issue a "John Doe" summons that would require Coinbase to provide information on any US persons who at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21.

That no doubt alarmed a lot of tax evaders. For obvious reasons, Bitcoin and other virtual currency transactions don't produce any third-party documentation, like the 1099s you receive from your bank or investment brokers.

Coinbase refused to comply, complaining that the summons was "indiscriminate and over broad". The IRS, sensing a battle, responded by reducing the scope of the summons to include only users who had made "at least the equivalent of $20,000 in any one transaction type (buy, sell, send or receive) …"

Since Coinbase is under heavy scrutiny, many criminals (and others} have left Bitcoin in favor of other virtual currencies like Zcash, which promises to "fully protect the privacy of transactions using zero-knowledge cryptography", or Monero, which offers "secure, private, untraceable currency".

It looks the game of "Follow the Money" is still going strong.

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