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COL. COLUMNS I Tax Practice & Procedure
Reporting Virtual Currency Transactions to the IRS
Time May Be Running Out for Affected Taxpayers
By Sharon L. McCarthy
RS Notice 2014-21, issued on March 25, 2014, made it clear those transactions and, when appropriate, can be liable for
that the IRS would treat virtual currencies that can be converted penalties and interest. In more extreme situations, taxpayers
Iinto traditional currency as property for federal income tax pur- could be subject to criminal prosecution for failing to properly
poses (http://bit.ly/2C5pFzq). This means that gain from the sale report the income tax consequences of virtual currency trans-
and exchange of virtual currency is subject to taxation. Given that actions. Criminal charges could include tax evasion and filing
many are attracted to virtual currency because of its anonymous a false tax return (emphasis added).
nature, tax preparers should expect that individual clients might This change in the IRS’s position on virtual currency reporting
not volunteer information about virtual currency transactions at tax should set off alarm bells for taxpayers who thought they could
time. Recent events suggest, however, that the IRS is not sitting avoid reporting these transactions. It should also encourage CPAs
back and waiting for taxpayers to fully disclose their virtual currency to ask individuals about their virtual currency activities.
activities. Failure to report such transactions may result in penalties
and, potentially, criminal prosecution. IRS Efforts to Obtain Virtual Currency Users’ Information
On March 23, 2018, the IRS issued a reminder that income Taxpayers should be mindful of the fact that the IRS has a
from virtual currency transactions is reportable (“IRS Reminds number of effective enforcement tools available, such as the
Taxpayers to Report Virtual Currency Transactions,” “John Doe” summons that, pursuant to Internal Revenue Code
http://bit.ly/2vpWHer). While the 2014 notice mentioned potential (IRC) section 7602(a), can be issued by the IRS only after
accuracy-related and information reporting penalties and noted that approval by a district court. Such a summons allows the IRS to
“penalty relief may be available” due to reasonable cause, it did investigate the tax liability of a specific unidentified taxpayer or
not reference potential criminal penalties. The 2018 reminder states: group of taxpayers. The John Doe summons has been used with
Taxpayers who do not properly report the income tax con- great success in the IRS’s enforcement of undisclosed offshore
sequences of virtual currency transactions can be audited for bank accounts, starting with the summons issued to UBS in 2008
64 MAY 2018 / THE CPA JOURNAL