IRS and Cryptocurrencies – A Complicated Relation
With the recent spate of regulations, it is quite understandable that cryptocurrencies have been veering from side to side. This wobbling has been occasioned by a series of events. The collapse of South Korean and Japanese stock exchanges has been definitely sobering. People have decided that mortgaging their homes to participate in the crypto madness is also worth it, but subsequent slumps in the value of Bitcoin may have dampened their wildest hopes.
Enter the Internal Revenue Service. Amid the general concern, a hawkish regulator is now testifying its curiosity in the matter of cryptocurrencies. If you feel that this could make the life of individuals involved rather unpleasant, you are right.
Bitcoin has been cited as an originator of illegal transactions. Unfortunately, it is true. However, the general controversy around cryptocurrencies is not new. What the exact implications for individuals, both of reputable and shady disposition, remains to be seen. We estimate that people will have to be concerned about their crypto assets insofar as:
- The IRS will start looking into whether these assets are being properly taxed. This will require commitment on the part of individuals who want to keep their riches anonymous. However, the IRS is against the idea of having people own untaxed goods.
- As the proliferation of cryptocurrencies for rampant uses continues, central banks have called for the better regulation of the matter. Most recently, Bank of England Governor Mark Carney has landed his qualified support for the assets, but called for more regulation of the nefarious purposes for which they are used.
The interest of the IRS in cryptocurrencies is quite understandable. Hackers and rogue regimes have been enriching themselves and skirting international regulation. Not only that, but seedy characters have been enriching themselves and dodging sanctions, thus defeating the financial levels that institutions generally use to control dissident groups and whole countries.
It all started with Coinbase
Coinbase was the first stock exchange to give up the gun when the IRS came looking. Now, the exchange will be obliged to comply with a court order, which mandates that it should reveal transaction information on estimated 13,000 users who have been using the company to carry out operations with crypto assets.
In an official statement made by the company, Coinbase explained that ‘In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government.’
However, this announcement alone is not the only mishap that Coinbase has had to undergo in recent times. Recently, the exchange charged users for transactions that have been carried out in the past. And all of this comes at a time when Coinbase has been receiving more pressure from Circle, a flagship competitor, who has recently acquired Poloniex.
In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government.
However, the chief problem with the latest development with Coinbase is not so much that an efficient company may go down under a pile of regulations. Rather, the concern of users is that the IRS will establish a precedent and moving forward, governments around the world will be asking freely to intervene in all transactions concerning cryptocurrencies, and thus defeating the purpose of these digital chunks of gold in the first place.
Should Taxpayers Be Concerned?
If you are a law-abiding taxpaying citizen who has been a tad vague on whether taxes should be paid on cryptocurrencies up until now, you have all reasons for concern. The IRS may demand people who have not done so to pay back taxes.
Provided the volatility of the cryptocurrencies, it may well be so that people who have owned thousands of dollars back in the day when Bitcoin soared, but failed to declare their tax, will now have to deposit amounts that far exceed the worth of what they have.
Granted, this is unfair on many counts. The IRS cannot charge tax on what Bitcoin or any alternative cryptocurrencies you have based on what you own this month. The volatility of price is a roller-coaster that will mandate a more careful examination of how to regulate it.
Instead of slapping crypto-owners with back taxes that are untraceable, ask of them to pay a flat rate on their current assets and then introduce a reliable way to track and trace those owners and the amount they must pay.
A more plausible way to do this would be by gauging the income from cryptocurrencies that people have accumulated throughout a year. However, this would require that owners treat cryptocurrencies as properties or a saving account rather than as active items of value that they can exchange for goods and services.
The future of cryptocurrencies is definitely intricate and challenging.