Alternative Currency, The Dark Web, Bitcoin, Death, and Taxes

As the era of technology is constantly changing to fit the needs of everyday people, probably one of the more unusual parts of life is changing all in the name of anonymity, which has spurred virtual currency. The Dark Web is a place where people can browse the web anonymously, but it still tracks methods of payments through a credit card. Browsers were adjusted to stop web tracking to increase security, for example Tor Browser. Some websites don’t even work unless you use an anonymous browser like Tor Browser meaning that people don’t have access to the entire web unless they adjust the original search browser. In addition, people can adjust the location of the browser by using additional security measures like IPVanish to hide your IP Address which shows your geographic location. With multiple layers of security, the method of payment was still not secure, and therefore, cryptocurrency was born.

Several forms of cryptocurrency exist, the most popular of which is Bitcoin (BTC) currently valued at 1 BTC = $741.77 as of November 23, 2016. Cryptocurrency can be used to purchase items on the internet, or can be purchased as an investment. Like stock, the gain isn’t realized until the item is either used during a purchase or sold. Like foreign currency, Bitcoin requires that amounts be disclosed by filing a foreign bank account record (“FBAR”) for amounts over $10,000 per an IRS Analyst for the Offshore Voluntary Disclosure Program (“OVDP”). Many tax preparers have identified this issue and are now adding the question of “Do you have Bitcoin?” into their tax organizers.

One of the more popular reasons to have Bitcoin is for use in purchases that you would prefer not have on a credit card statement, like illegal drugs or weapons on the internet, both of which are obviously illegal. With multiple levels of security already present to remain anonymous online, Bitcoin is the solution that many people were waiting for to bring confidence to buyers in an ecommerce market where your identity is the most valuable.

Whatever the reason you may have for owning Bitcoin, it is an up and coming tax issue, and has been for some time. While the IRS continues to increase regulations to close the tax gap, by issuing 1099-K’s on merchant accounts, and requiring more information returns to be filed on vendors, Bitcoin is one issue that the IRS hasn’t managed to pin down. The Treasury Inspector General for Tax Administration (TIGTA) has already identified the issue, and is attempting to find a way to monitor and track the information. If you are identified during an audit as a person who has Bitcoin, it may be new territory for the IRS to determine what they want done.

Recently, in November 2016, the IRS issued a summons to Coinbase for information on its users. Whether or not the IRS is successful in obtaining the information will be left to the Court. If the IRS is successful, no doubt the FBI and DEA will want this information for leads in illegal drug and weapons cases, but the IRS will have potential disclosure issues.

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Silver Law, PLC

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