How The IRS Plans To Catch Tax Fraud From Bitcoin Investors

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The IRS is coming for bitcoin investors who are not paying their fair share on their gains.  The message is that the IRS is fully aware of what bitcoin investors are doing, and they have a secret weapon. 

Special Agent Gary Alford, the man who broke the Silk Road and took Ross Ulbricht down, is now the new cyber-crime coordinator for the IRS.

Special Agent Eisner says enough already. Enough with the sensational criminals. It is time for the run of the mill enforcement of cryptocurrency tax law.

According to Eisner, for once law enforcement is ahead of the curve.  The IRS believes the time has come to prosecute bitcoin tax evasion and they say that they are ready to go to a jury and get convictions according to Forbers.com.

Tax practitioners are asking the IRS for more guidance on the existing regulations.  New direction expected in June is expected to resolve any uncertainty on how to deal with the cost basis when a fork occurs.

Practitioners must ask their clients about crypto gains. Gains can be taxed like gains on stock investments. This is, however, simplistic. Bitcoin taxation can be quite complicated.


According to the IRS’ official guidance, crypto is property for purposes of taxation.  Hence, if you buy bitcoin and hold onto it for longer than a year, you are liable for the long-term capital gain tax. 

Individuals earning more than $425,000 or married couples who make more than $479,000 will pay 20%. Those under these thresholds pay 15%.

When buying virtual currency with fiat (buying it for the first time using dollar), no taxable event is recorded yet. However, as soon as any gains are made, the investors are liable to file with the IRS.

This is problematic. Compliance is very low.  Figures obtained when the IRS summonsed the records of Coinbase, show that only 800 out of more than 20,000 investors who made gains, filed with the IRS.

This lack of compliance is what spearheaded the IRS to go public with Special Agent Eisner.  It is hoped that these typed of high profile outreach would move investors toward voluntary compliance.  Taxpayers that wilfully conceal crypto gains can be prosecuted if they kept records of their investments or revealed it to their accountants.

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Ignorance if the law, of course, is no excuse.  Considering that bitcoin is taxed at rates that compare very favorably with other investments, no leniency should be expected when the prosecutions start.  Gold, for example, as a collectible, is never taxed below a rate of 28%, even if you are invested in a gold exchange-traded fund.

Currency taxation is even more perilous for the investor.  Currency is always taxed at regular income rate, never as capital gains.  If you own currency shares, no matter how long you have held it, you will never pay capital gain rates. Marginal income tax rates can be as high as 37% on federal tax.

Commodity futures are even more perilous in respect of taxation.  Section 1256 contracts (commodity futures and EFTs that hold commodity futures) is marked to market at the end of the financial year. This means you owe taxes on paper profits irrespective whether you sold or not.

What’s worse, 60% of all gains are considered long-term capital gains, and 40% as short-term capital gains.  Blended, this leaves a tax rate as high as 26.8%.  Short term capital gains taxes are even higher, with rates up to 37% for top earners.


cryptocurrency tax

Tax Planning For Cryptocurrency U.S. Investors


Bitcoin futures are indeed section 1256 contracts and carry these tax consequences.  Investing in funds that hold bitcoin, directly holding bitcoin is not section 1256 contracts.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

If you would like to benefit from our expertise in these areas, or if you have further questions on this advisory, don’t estimate to contact our specialists or call us 786 462 7899.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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