Over the past few years, bitcoin has made an unknown number of people very, very rich. But in the 2015 tax year, the IRS reports that only 802 Americans filed taxes disclosing income from the sale of bitcoins. It’s impossible to know the exact number of bitcoin users in the U.S., but the true total dwarfs 802 — which means some people aren’t right with the law, and the IRS is coming.
The law is simple, says Tyson Cross, the founding partner of Cross Law, a firm that specializes in tax law concerning bitcoin and other cryptocurrencies. Revenue from selling bitcoin or any other online currency counts as income, and must be reported to the IRS. For years, Cross says, leaving off cryptocurrency profits was “a pretty common temptation in this space.”
“I think over the last few years it’s becoming more and more acceptable to recognize that if you’re a U.S citizen or taxpayer that you need to include your income on your tax return and report that accurately,” Cross tells Inverse. “There certainly was or has been lots of people who weren’t doing that, and the IRS has caught on.”
“When it comes to the IRS, unreported income is a criminal offense,” Cross says. “I’m willing to bet the IRS is just itching to make a big case out of somebody just to send a message, and I don’t think anybody wants to be that guy.”
The IRS’s claims that only 802 people declared gains or losses on seem extremely low, considering the thousands, if not millions, of bitcoin users in the United States. Cross explained that some tax returns he prepares include bitcoin assets and transactions disclosed in a supplementary list or sheet that may or may not be digitized, which may explain part of the low numbers — but if that’s not it, there are a lot of people making a lot of money that they aren’t sharing with the IRS.
When reached by phone on Wednesday, Dean Patterson, a spokesperson for the IRS, told Inverse that he would try to track down statistics for bitcoin tax disclosures for the 2016 tax year, but wasn’t sure if that data was available yet. Outside the context of his IRS job, Patterson says that he is personally “mystified” by the concept of bitcoin. As for what’s going on with the tax agency, he couldn’t say much.
“In general, the IRS does not discuss our ongoing enforcement efforts or ongoing criminal efforts because it’s not in our best interest to do that when something’s happening,” he says. “If we’re running some sort of enforcement effort we don’t discuss that while we’re doing it and frequently, we never discuss it.”
While the IRS’s case with Coinbase is far from over, Cross says that for big-money users who may fall within the parameters the feds are looking for, it’s pretty much already too late to fix mistakes from previous tax years. The IRS has a three-year statute of limitations to audit someone’s tax returns, but that safeguard does not exist if the government considers a tax return to be fraudulent.
“If you don’t report income and it was substantial,” Cross says, “they have a pretty good case that your tax return that year was fraudulent.”
The only recourse, he said, is to find a lawyer and accountant that can go back and amend the records from previous tax years to reflect correct incomes. Making an attempt to correct the record “before the IRS comes knocking,” Cross says, is “one of the big mitigating factors” that can keep a case from straying into the criminal offense territory. Over the years, Cross says, the desire to go back and amend has “driven quite a lot of people to my office,” particularly during the boom year of 2013 when he first started specializing in cryptocurrencies. The past six months, he said, have been “absolutely crazy,” expanding his bitcoin clients by “at least 10 times” their numbers.
Part of the issue is that taxes are complicated enough without having income from a global, deregulated system with a constantly fluctuating value.
“Filing taxes is already a hairy mess,” says Erik Finman, the recently 18-year-old investor who claims to have made a million on bitcoin. “But filing taxes involving Bitcoin, cryptocurrencies, and being under 18 is not just a hairy mess, but it’s literally like getting a comb stuck in your messy hair and you are just trying to pull it out. But it just keeps getting worse until you have to get the scissors out.”
On the internet, where nothing is ever truly deleted, data can live forever, and even death is no longer certain. But taxes sure are.