Being targeted by the IRS, American Bitcoin users are not far from paying taxes

The recent news regarding the IRS and Bitcoin is disturbing, but it is only the tip of the iceberg as the IRS looks to expand the Foreign Account Tax Compliance Act (FATCA) to cover Bitcoiners. US Bitcoiners should be aware that their transactions over the past few years could put them at risk.

IRS is targeting Bitcoin users

As early as November 18, Coindesk reported that "IRS is seeking to investigate Coinbase's Bitcoin user data." The article mentioned: "It seems that the IRS is actively investigating digital currency users in the United States, and its focus is on those American users who have conducted Bitcoin transactions between 2013 and 2015." The investigation is based on a "John Doe" subpoena, which has also been approved by the US court.

Currently, this incident is still fermenting. A Coinbase customer has filed a lawsuit to try to prevent the IRS from accessing these transaction records. However, the possibility of this lawsuit being approved is very low. The IRS has a 90% winning rate in such cases. Although Coinbase is also resisting the IRS, it will almost certainly comply with the court order. At present, the hope of stopping the IRS is very slim.

Meanwhile, the IRS is currently discussing a key measure in which the agency hopes to expand the Foreign Account Tax Compliance Act (FATCA) to cover bitcoin users (bitcoiners).

What is the Foreign Account Tax Compliance Act (FATCA)?

The Foreign Account Tax Compliance Act (FATCA) is a mandatory mechanism for tax policy. The bill was officially signed by Obama on March 28, 2010. FATCA requires foreign banks and financial institutions to report the accounts and transactions of US customers. It is not aimed at individuals, but institutions. Compared with other bills, the power of FATCA lies in that even a foreign financial institution that has no connection with the United States has certain obligations to disclose specific US individual or corporate accounts to the US government.

In addition, the definition of Americans who are subject to tax obligations also includes "dependent Americans", who may have never set foot on American soil, but at least one of their parents is American, so these people are considered dual citizens. For example, Ted Cruz, who was born in Canada, can run for president of the United States because his mother is American. It is estimated that one in 20 Canadians is an American immigrant or "dependent American". According to the FATCA Act, these people need to pay taxes (it doesn't matter if the taxes are paid to foreign governments).

You may wonder, can a US bill also affect financial institutions in other countries? In fact, this is indeed the case.

In a report from Forbes, tax attorney Robert W. Wood explained:

“Non-compliant institutions face a freeze in the U.S. market, so they have little choice but to comply. If these companies do not pass on the data of U.S. users, FATCA will cut off these companies’ access to U.S. financial markets. More than 100 countries have agreed to this law. These countries must agree to this law or face dire consequences.”

FATCA will almost certainly target all US Bitcoin users, as this is an untapped wealth. Its first targets will be native Americans, who are low-hanging fruit, and those "affiliated Americans" who are more difficult to track will likely be the next targets. The first step in revealing this strategy is to require cryptocurrency financial institutions, such as Coinbase, to comply with IRS compliance requirements.

As early as March 2014, the IRS issued a notice that explicitly stated that digital currencies would be taxed as property. This news was far-reaching, as it mentioned that wages paid in Bitcoin would be subject to income tax, etc. However, these policies had little impact on the digital currency community because the IRS lacked an enforcement mechanism.

The FATCA Act for financial institutions can be an effective enforcement mechanism, and if these financial institutions comply with this regulation, enforcement will undoubtedly start in the U.S. However, given the high flexibility of digital currencies, the IRS will quickly track foreign exchanges in the same way after regulating banks.

in conclusion

Americans who have used Bitcoin financial institutions (such as exchanges) should be aware that their Bitcoin transactions over the past few years are vulnerable to scrutiny by the IRS. According to cryptocurrency tax expert Daniel Winters:

“If your transaction records are sent to the IRS, you may not be notified for a while, but you will receive a letter from the IRS and you will be notified that the IRS is demanding tax on your bitcoin income.”

What do you think about this?