It was inevitable. The Internal Revenue Service (IRS) has begun cracking down on cryptocurrencies.
Coinbase, which is the largest cryptocurrency exchange in North America, just announced that it would send the IRS financial information about 13,000 of its users, in order to comply with a court order. The company issued a statement in which it said that it fought the order, so that it could protect its customers from government intrusion. But it ultimately did not succeed, and it will be giving the IRS the names, the tax IDs and transaction data for anyone who traded more than $20,000 worth of cryptocurrency from 2013 to 2015.
This event could eventually have dire consequences for those Americans who believe their cryptocurrency transactions are beyond the scrutiny of the government, particularly the IRS. According to the tax filing service Credit Karma, of the 250,000 users who have already filed their 2017 income tax return with the company, less than a hundred of them reported any cryptocurrency transactions. Many see this 0.04% of users to be on the very low side, and with average cryptocurrency returns in 2017 hovering around the 14,000% mark, this could mean some people could soon find themselves with a large unexpected tax bill, including penalties.
As the IRS considers cryptocurrencies property and not money, if someone sells cryptocurrency for a profit, then capital gains tax applies. Even worse, if someone sells cryptocurrency that they have owned for less than a year and sells it for a profit, than this profit is taxed as ordinary income. All this is true regardless of whether someone sells cryptocurrency for dollars or exchanges it for products or services. Every cryptocurrency transaction is a taxable act.
While cryptocurrencies have provided holders with a certain level anonymity, they might not provide the kind of anonymity many of them expect. Trading exchanges like Coinbase are often legally required to maintain identifying information about traders, and even more anonymous forms of exchange leave a trail can be followed.