The US Government and its Strategy to Collect Crypto Taxes

Imagine a land without rules. Where crypto transactions are anonymous and capital gains taxes do not exist. Imagine a place where laws don’t apply, where regulations don’t reach. All the while, there is a gold rush going on. People happily making millions, losing millions and worrying only about the Next Big Thing.

The crypto world has been the Wild West of Investment for more than ten years now.

This is about to change.

Awakening a Sleeping Giant — the IRS is Opening its Eyes

It seems the IRS has gotten wind of Manifest Destiny and are now slowly waking up to the sweet taste of pseudo-anonymous gains and uncollected taxes.

In a (horribly designed and formatted) Powerpoint presentation that was published/leaked by TaxNotes on July 3, 2019, the IRS seems to be catching up. Big time.

While they chose a design that includes slides like this one:

Stock-image with Euro bills? PowerPoint Design from 2009? Unreadable fonts? Who else but the Government!

…the actual content is not half bad. After a rough explanation on cryptocurrencies in general

A cryptocurrency is a digital currency using cryptography to secure transactions and to control the creation of new currency units. Since not all virtual currencies use cryptography, not all virtual currencies are cryptocurrencies.

and describing a few coins and histories in more detail:

Bitcoin Cash (BCH) is a cryptocurrency. It is a result of a prolonged disagreement on how to handle the bitcoin [sic.] scalability problem. […] At the time of the fork anyone owning bitcoin [sic.] was also in possession of the same number of Bitcoin Cash units.

the presentation gives a crash course on everything from mining to how distributed ledgers and hard forks work to where people can buy cryptocurrencies.

What are they planning to do?

In 2 words: a lot. The IRS Program Manager for Cyber Crimes suggests quite the intrusive program of Grand Jury Subpoenas — not limited to the crypto world but rather directed at Apple, Google, and Microsoft — to chase down your crypto wallets.

Issuance of a Grand Jury Subpoena should be considered for Apple, Google, and Microsoft for the Subject’s complete application download history [and]
should also be considered for […] the Subject’s financial accounts, including, but not limited to, the Subject’s bank, credit card, and PayPal records. […]
Transfers to and from a Subject’s PayPal account should be analyzed in much the same way, verifying the parties involved with each transactions.[…]

If it is identified that the Subject does maintain a bitcoin balance, an attempt should be made to identify the Subject’s Bitcoin Wallet and associated Bitcoin Addresses, as well as the balance for each Bitcoin Address.

– James Daniels, Program Manager — Cyber Crimes IRS

The IRS could then figure out whether you ever downloaded any suspicious software (“suspicious” being anything even remotely related to cryptocurrencies) and investigate further using widespread nets of social media, and even financial forensics companies such as Chainalysis, CipherTrace, or Elliptic to trace every last tax-free Bitcoin gain in your portfolio.

Once a Bitcoin Address is identified, it can be looked-up on a Bitcoin Blockchain Explorer to find information such as value, transaction times, transaction locations, which may help in corroborating information, identifying additional addresses, or assist in locating the Subject.

But what does this mean for you?

It means that the Wild West is about to change. There is a new Sheriff in town — and he is serious about keeping everyone in line and paying taxes.

So far, there are no known cases of tax fraud charges brought forth against “simple” retail investors, but considering this powerpoint, it won’t be long — and the IRS know their stuff.

Fueling the Fire

You may think about the President whatever you want — one undeniable fact is that negative attention by Trump often leads to action by lawmakers. And negative attention is exactly what the world of crypto received on July 11th.

Though tax returns are not necessarily his strong suit (hehe), it is to be expected that the IRS will be extra motivated to prove that Bitcoin users are not the law-abiding citizens that they themselves like to claim.

For the Internationals among you — the OECD is not sleeping

The FATF (or “Financial Action Task Force on Money Laundering” for the uninitiated) have cast their eyes on exchanges and everything going on with them as well. In a statement from June 21, 2019, they have agreed on strict KYC regulations for crypto exchanges stating that the personal information of both the sender and the receiver of cryptocurrencies should be stored by the respective exchanges.

This obviously makes the IRS’ job even easier.

US Treasury Secretary and Crypto — It’s Complicated

In a press conference on July 15, the US Treasury Secretary Mnuchin has especially talked about two topics: Cryptocurrencies in general (and their potential to be used for unlawful practices), and Libra, the crypto project that Facebook and a bunch of other big tech companies and investors have introduced recently.

Mnuchin was not enthusiastic about the new technology but rather cautioned about the security and privacy concerns that many governments have expressed.

For the Libra project, he said that his office is currently not comfortable with a Libra launch due to unresolved regulatory issues, but he also stated that they are in open discussions with Facebook.

While there might be a lot of concerns with Facebook acting as an emitter of currencies, one thing seems perfectly clear: Crypto is here to stay.

What happens next?

The statements of focus groups, officials, Presidents, offices, and agencies are still coming in and the flood of regulations has just started, so it is hard to speculate about what might or might not happen next.

One thing that we do expect is that regulators have woken up and are going to take a closer look at anything that relates to Crypto.

With support from tech giants and with the attention of even the highest office it is to be expected that the Wild West is about to change drastically. Hold on to your hats — but don’t forget to declare your taxes.