The IRS is worried. The meteoric rise of cryptocurrencies like Bitcoin has led to something of a techno-money "boom" in recent years. Consequently, the IRS wonders whether or not it's getting its fair share of the profits.
As with other monetary transactions, Bitcoin exchanges are subject to capital gains taxes or income taxes if the currency was held for less than 12 months (short-term gains). This is because under IRS regulations established in 2014, Bitcoin and other so-called "virtual currencies" should be treated as capital assets or property for tax purposes, not as actual currency.
However, even with these regulations, the IRS remains concerned taxpayers aren't dealing fairly with the federal government.
The scare tactic
In late 2016, the IRS asked a federal court in northern California to subpoena the records of Coinbase, one of the major cryptocurrency exchanges in the United States. This "John Doe Summons" requested that the company turn over all account information for any Bitcoin transactions the company facilitated so that the IRS could verify those transactions against consumers' tax returns.
Subsequent litigation limited the IRS's infograb to only transactions valued at more than $20,000 and only those exchanges (either for U.S. dollars or Bitcoin-to-Bitcoin exchanges) that occurred between 2013 and 2015. Even still, this kind of governmental scare tactic has some consumers concerned that the assumption of fraud by the IRS may have long-term consequences on the viability of cryptocurrency.
Accusations don't equal tax fraud
The truth is that regulations on Bitcoin and other virtual currencies are still unclear to many, consumers and institutions alike. These misunderstandings could lead at best to an IRS audit, and at worst, allegations of tax fraud.
Most Bitcoin users aren't out to break the law or defraud the government. Instead, they simply want to take advantage of the possibilities afforded by this exciting new financial market. Therefore, if you find yourself facing a court summons due to your Bitcoin activities, it's important to have an attorney skilled in fighting white collar crime charges on your side. The arguments involved will be complex and highly nuanced, especially because the law is still evolving on this issue.