IRS Might Soon Go After US Bitcoiners

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Recently, a digital asset exchange company based on San Francisco, California known as Coinbase was targeted by the Internal Revenue Service (IRS). Looking for data on Coinbase’s customers, reports showed the IRS had been looking into police digital currency users. The investigation focused on individuals who used Bitcoin between 2013 and 2015. At the time, “John Doe” warrants were deployed, indicating the IRS may have been looking for individuals using digital currency to evade tax payment.

Once customers were made aware of the federal government’s response, a lawsuit was filed. But despite Coinbase’s resistance, future court orders could jeopardize their principled stance in favor of their customers’ privacy. Hoping to block the IRS from having access to the company’s database without forcing Coinbase to get deeper into this fight, one customer sued the agency. Nevertheless, the suit is expected to fail. So what could happen next?

In an article, libertarian feminist Wendy McElroy explained the brake on the IRS won’t last. Why? Because the agency may be looking into extending the Foreign Account Tax Compliance Act (FATCA) in order to have the enforcement basis to go after Bitcoin and its users. Since FATCA is the enforcement mechanism behind Report of Foreign Bank and Financial Accounts (FBAR), McElroy believes that the IRS may be using FATCA to target institutions, framing individuals by “strong-arming institutions to provide open access to their accounts.”

If the IRS has its way, McElroy explained further, FATCA will be targeting Americans who own bitcoins and who used the digital currency in transactions over the years. But she also warns that “accidental Americans” such as foreigners with dual citizenship will be next.

Despite the risk, this is not the first time the IRS showed signs of trying to get a hold of Bitcoin enthusiasts.

In March of 2014, the agency issued a notice reporting that digital currency was property and should be taxed as such. Laying the groundwork for what the IRS is doing now, the agency established a basis to go after users who haven’t reported their bitcoins to the taxman. Due to the notice of policy change, individuals getting wages, paying, or receiving in digital currency in exchange for goods and services were now subject to being taxed for those transactions. So far, Bitcoin enthusiasts and users have not reported harassment, but that’s because the IRS lacks an enforcement mechanism. With FATCA, agents may now enforce the new rules.

For bitcoiners, the warning is clear: Be aware that the last few years worth of transactions might be under scrutiny. And if your records are under investigation, you may only learn about it when the IRS sends you a letter demanding payment on bitcoin-related income.