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IRS scores victory over cryptocurrency trading platform

After a year-long battle in court, the Internal Revenue Service (IRS) has notched a victory over Coinbase, a leading cryptocurrency exchange headquartered in San Francisco. The Nov. 28 federal court ruling ordered that the company turn over the identities of more than 14,000 of its users.

The decision was a triumph for the IRS, who had claimed that only a small portion of digital currency owners acknowledged their holdings in their tax filings.

As a result of the court ruling, records of users who bought, sold, sent or received more than $20,000 worth of Bitcoin between 2013 and 2015 must be turned over to the IRS. These records include names, addresses, birthdates and account activity.

Coinbase had previously decried the IRS's efforts to get information on its customers, citing the government's overtures to be a violation of privacy.

A new frontier in currency

Bitcoin first emerged in 2009 as a decentralized online currency system. A completely digital currency, Bitcoin and similar crypto-products like Ethereum and Litecoin have no physical bills or coins. Its owners are entirely anonymous, and buyers and sellers are connected peer-to-peer (P2P) via encryption keys--hence the term "cryptocurrency."

Unlike traditional currency, Bitcoin is not issued from the top down, but instead "mined" by computers using advanced math and detailed record-keeping. Only 21 million Bitcoins can exist at one time, and roughly 12 million have been mined so far.

Cryptocurrency is unlike traditional securities in that it can be bought and sold on an app like Coinbase, and no minimum deposit or brokers are required. Not tied to a company's profits like a stock, Bitcoin's value is a wildcard, and as such its price can be volatile.

How is Bitcoin taxed?

After experiencing a year of unprecedented growth, Bitcoin has been prominent in the financial headlines. As the flagship cryptocurrency, Bitcoin has caught the attention of speculative investors in droves.

As scores of individuals line up to cash in, it's important to note how the IRS views and taxes Bitcoin:

  • The IRS considers Bitcoin to be property.
  • Selling the digital currency opens you up to capital gains and losses.
  • Income paid in Bitcoin is taxable.
  • Spending Bitcoin is two transactions: selling the currency, and spending the equivalent dollar amount.
  • Business transactions conducted in Bitcoin face all the normal sales tax rules, as well as those for information reporting and withholding.

How will this decision impact you?

The November court order suggests that the IRS feels there is some degree of tax avoidance occurring with Bitcoin. This Digital Wild West is currently a pace ahead of the law, but legal rulings like this one suggest that it's catching up.

To protect yourself as a Bitcoin owner, you need to remember that every transaction is taxable, and you must report your capital gains and losses. If you have tax questions related to Bitcoin or other assets in your portfolio, you may want to consult with a legal professional. At Goldburd McCone, our experienced tax attorneys keep abreast of the latest emerging tax law, and we can assist with your diverse asset management tax needs.

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