New york, USA - Avgust 22, 2017: Male hand holding Bitcoin in front of cryptocurrency invest chart.

In late July the IRS sent letters to 10,000 owners of cryptocurrencies advising them of their tax obligations.  In the second week of August, the IRS sent a second round of letters to known users of certain cryptocurrency exchanges.  In some cases, the letters sent in July and August come with a bill, advising taxpayers of money they owe in back taxes plus interest.  In other cases, it was merely advising of the obligations for filing.  It is rare that the IRS sends a letter to anybody that is not in response to a filing or a known non-filing – the IRS does not even send letters acknowledging properly filed returns – so we can know that the IRS is serious.

The IRS has communicated that it is actively advising and searching for cryptocurrency traders who are not meeting their reporting and payment obligations.  The effort is extensive.  Though all traders are being questioned, only a few may end up owing taxes.  But all investors in cryptocurrency have a legal obligation to disclose their holdings on the FBAR.

How did the IRS know who should get a letter?  In 2017 the IRS won a landmark case against the major currency exchange Coinbase which required Coinbase to hand over the entire list of customers who exchanged USD $20,000 in cryptocurrency between 2013 and 2015.  Coinbase handed over an undisclosed number of accounts, but the number can be estimated – at the end of 2013 Coinbase says that it had 650,000 accounts.  Today, it has over 30 million.[1]

Exchanges Beware

It is not only individual traders who should be concerned.  Under IRS regulations, asset custodians are required to issue 1099-Bs or 1042s to clients earning money on the exchanges.  Exchanges should be vigilant in issuing the proper documentation to their customers as the fines range from $50-$270/slip to maximums over $547,000 for small business and greater amounts for larger businesses.

Far from the end, most agree that this is only the beginning.  The IRS has already said that criminal indictments involving cryptocurrencies are expected soon.[2]  Those who have not received a letter have no reason to rest easy – the IRS has also said that letters are sent out between one and two years after the failure to file a return.  Non-filings for 2018 have not even been evaluated.

US Reporting Obligations

For US persons, few are aware of the obligations for cryptocurrency trading or even long-term investing.  First, every transaction is a reportable tax event which may or may not generate tax owed.  Second, and most painful if not followed, cryptocurrency is specifically designated as a foreign holding and must be disclosed on your FBAR.  This is true whether your cryptocurrency wallet or custodian is resident in the US or not.  The penalties for non-disclosure of foreign bank accounts start at a minimum of $10,000/account/year and continue up to half the value of the unreported account.

Amnesties and forgiveness for past non-reporting are possible – the key is, to become compliant before the IRS asks.  File with the IRS before they ask.  Even after this point, relief is available.  Ask your tax advisor.

This is an extremely fast-moving area of tax and more IRS Guidance on reporting obligations are coming this month.  If you are invested or trade-in cryptocurrency, ask a qualified tax advisor.

Canadian Enforcement

With the IRS hot on the trail of cryptocurrency activity, the CRA is not far behind.  In 2017, the CRA established a dedicated cryptocurrency unit.  In March of 2019, the CRA sent its own round of letters asking individuals to provide all of their trading data for the prior ten years – that is the same number of years that Bitcoin has been in existence.  As of March 6, 2019, the CRA has 60 active audits underway.[3]  Furthermore, the CRA has spent an additional $2B over the past two years to hire more agents for the stated purpose of recovery more unpaid tax dollars.  Obligations in Canada mirror those in the US:  cryptocurrency trading is a reportable event.  As well, cryptocurrency is specifically a “foreign asset” subject to the disclosure rules for foreign property.  This is true no matter where you live or what crypto providers you use.  Penalties for not filing the foreign disclosure are the greatest pain, at $2,500/year.

Like the US, Canada does have an “amnesty” type filing, offering forgiveness for prior non-filings.  Penalties can be waived.

Canada and the US are now only two of several countries which have begun similar efforts.  France and Denmark have started enforcement programs and other EU countries are not far behind.

If you have any cryptocurrency dealings whatsoever, call for your free consultation to learn your obligations.  Penalties can be high and there is no limit to how far back either CRA or the IRS can go to collect outstanding debts.

[1] “IRS to Cryptocurrency Traders:  Come Clean, or Else!”, The Wall Street Journal, August 18, 2019.

[2] “IRS Sends Second Round Tax Warnings to Cryptocurrency Investors”, The Wall Street Journal, August 15, 2019.

[3] “Bitcoin Investors Targeted With Audits By Canada’s Federal Tax Agency”, Forbes, March 6, 2019.

Shawn Bausch, CPA (CA), BBA is a tax manager at Sloan Partners. Contact Shawn by email or call 416-665-7735 (ext.335).

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