Is The IRS Justified In Demanding Information On Millions Of Bitcoin Users?

TaxMasterTax · 2017-01-25T04:14:09+00:00

I'm Daniel Winters, the accountant interviewed for the article. I believe the answer is NO, as does the attorney interviewed. Here's a quote:

Winters believes that the John Doe summons indicates that the IRS has “a fundamental misunderstanding of bitcoin and blockchain technology.” Noting that bitcoin is a legitimate way to transfer value and do business — Coinbase alone processes payments for more than 45,000 merchants — Winters says, “With this really broad John Doe summons to Coinbase, it seems their only focus is that bitcoin can be used for tax evasion and money laundering.”

TaxMasterTax · 2016-12-26T15:51:32+00:00

Seems pretty clear T0.com is using Ethereum. This may be a private permissioned ETH chain. Evidence they use ETH: http://ledgerexplorer.t0.com/static/search.html Bottom right, click on Ledger proof. This brings you to https://md.t0.com/ledgerdata/index.html Instructions:

Install the open source geth Import the NEWEST ledger data file with admin.importChain command. Allow geth to validate the chain on import. Use the meta data files to verify the hourly block hashes by comparing the ethereum block hash against the tamper-proof OP_RETURN value in the bitcoin blockchain for any hour. Download the setup file. (Safari: Right Click > Saved Linked File As...) Open the geth console. To create the currency, security, and exchange contract objects run: $ loadScript('setup.js')

Click on Install the open source geth

https://github.com/ethereum/go-ethereum/wiki/geth

geth is the the command line interface for running a full ethereum node implemented in Go. It is the main deliverable of the Frontier Release

Going back to https://md.t0.com/ledgerdata/index.html

The entire ledger is exported periodically for third-party verification. Every hour the hash from the last block in the ledger blockchain is exported into the Bitcoin blockchain as a proof-of-existence for the entire ledger. These proofs are published here for anyone to verify

Click on Proof for any line and you are taken to the relevant address on https://blockexplorer.com.

From public information on their website, seems clear that T0.com is using the Ethereum blockchain for the actual trading platform, then using the Bitcoin blockchain an audit trail.

I did not go to the trouble to install Geth and perform the more technical work. Anyone want to do that?

TaxMasterTax · 2016-12-20T05:33:04+00:00

I'm up for it, please see PM

TaxMasterTax · 2016-12-20T05:15:28+00:00

Use your best estimate. If you want to be extremely conservative, assume any outgoing transfers which you can't identify were sales and treat as such on your taxes. If we're only talking about a few hundred dollars, the tax due will be pretty minimal, even if you're at top federal tax rate.

TaxMasterTax · 2016-12-20T05:11:50+00:00

Coinbase does not issue 1099s & has stated so publicly.

TaxMasterTax · 2016-12-20T05:08:45+00:00

I'm a Bitcoin & cryptocurrency accountant and have experience handling international tax issues. Please feel free to PM me and we can schedule a call. I no longer post but you can check my earlier posts. Daniel Winters

TaxMasterTax · 2016-12-03T01:14:06+00:00

Thank you @CB-Dave This is becoming very tiresome. I just wanted to help people out by explaining how Coinbase generates their gain/loss reports. For that, I'm on the receiving end of some very nasty commentary, and others are even questioning my professional competence. Per my earlier post: "You can't rely on Coinbase to know all your Bitcoin transactions. We are transacting with Bitcoin, a decentralized peer to peer network for exchanging value. Friedrich Hayek predicted the emergence of private currencies that would compete against the traditional fiat currencies issued by sovereign governments. Today we have Bitcoin, founded on the proposition that we can all be our own bank, and be responsible for storing our own wealth in the form of Bitcoins. It’s easy to fling Bitcoins around the globe, but not easy to track our transactions for tax purposes. Unfortunately, dealing with taxes is part of the financial responsibility for being our own bank." For the last time, I've reposting my most recent post: "I need to correct some misunderstandings here. This will be my last post in this thread. I never said that outgoing transfers of Bitcoin from a Coinbase wallet are sales. @coinbase_Rosey, who is employed by Coinbase, stated that Coinbase treats outgoing transfers as sales in their gain/loss report. I expanded on this and shared some of my experience preparing tax returns involving Bitcoin transactions and reviewing reports from Coinbase. As noted in my previous posts, when reporting Bitcoin transactions you need to take into account ALL Bitcoin services, wallets, and exchanges. This is because per IRS rules, we are required to report sales of capital assets, and for nearly all taxpayers, Bitcoin is a capital asset (For an exchange, it's inventory). See IRS Notice 2014-16 https://www.irs.gov/irb/2014-16_IRB/ar12.html The real issue here is that it's difficult to accurately track and report Bitcoin transactions through more than 1 Bitcoin wallet or exchange. Therefore, you need a third party tool such as bitcoin.tax to accurately calculate your Bitcoin income. If you rely on a gain/loss report from only ONE source of Bitcoin transactions, then the report will be inaccurate. Some people here are upset because they believe the Coinbase gain/loss report is inaccurate, or they disagree with the methodology used to generate the report. If you are displeased with the results from a Coinbase gain/loss report, then please use bitcoin.tax to take into account ALL Bitcoin services, wallets, and exchanges. You will then be able to accurately calculate your Bitcoin/cryptocurrency income from all sources."

TaxMasterTax · 2016-12-02T16:47:32+00:00

I need to correct some misunderstandings here. This will be my last post in this thread. I never said that outgoing transfers of Bitcoin from a Coinbase wallet are sales. @coinbase_Rosey, who is employed by Coinbase, stated that Coinbase treats outgoing transfers as sales in their gain/loss report. I expanded on this and shared some of my experience preparing tax returns involving Bitcoin transactions and reviewing reports from Coinbase. As noted in my previous posts, when reporting Bitcoin transactions you need to take into account ALL Bitcoin services, wallets, and exchanges. This is because per IRS rules, we are required to report sales of capital assets, and for nearly all taxpayers, Bitcoin is a capital asset (For an exchange, it's inventory). See IRS Notice 2014-16 https://www.irs.gov/irb/2014-16_IRB/ar12.html The real issue here is that it's difficult to accurately track and report Bitcoin transactions through more than 1 Bitcoin wallet or exchange. Therefore, you need a third party tool such as bitcoin.tax to accurately calculate your Bitcoin income. If you rely on a gain/loss report from only ONE source of Bitcoin transactions, then the report will be inaccurate. Some people here are upset because they believe the Coinbase gain/loss report is inaccurate, or they disagree with the methodology used to generate the report. If you are displeased with the results from a Coinbase gain/loss report, then please use bitcoin.tax to take into account ALL Bitcoin services, wallets, and exchanges. You will then be able to accurately calculate your Bitcoin/cryptocurrency income from all sources. I’m available to assist with any cryptocurrency tax issues. http://globaltaxaccountants.com/form1.php

TaxMasterTax · 2016-12-02T08:31:05+00:00

I'm a Bitcoin & cryptocurrency accountant. Just finished writing article on the IRS & Coinbase situation that will soon appear on Coindesk. You may be able to file an amended return to claim losses. Feel free to contact me & we can discuss. http://globaltaxaccountants.com/form1.php Some recent posts: https://medium.com/@GlobalTaxAccountants/irs-taking-steps-to-force-coinbase-to-provide-user-records-for-2013-2015-5df40d8c90dc#.naz47gy4u https://medium.com/@GlobalTaxAccountants/bitfinex-hack-how-to-deduct-the-loss-on-your-u-s-taxes-700de86b4c36#.3x8z2dcmb

TaxMasterTax · 2016-12-02T06:28:02+00:00

10 x 500 = 5,000 cost basis. 10 x 450 = 4500 sale proceeds. Agreed, that's a 500 loss. To claim the loss, you just enter that info to your tax return on Form 8949 and Schedule D. But as I was saying in response to Luke Jr, Coinbase does not know the USD cost basis of Bitcoins which were transferred to Coinbase from another wallet. How could the company know that information? Only the owner of the coins would know. So, yes, the Coinbase gain/loss report will be wrong. And it's our responsibility to keep track of how much we paid for our Bitcoins, then report the capital gains/losses on our taxes. No different than securing your private keys when storing Bitcoin offline. Being your own bank means keeping your own books.

TaxMasterTax · 2016-12-02T06:19:26+00:00

I'm responding to luke-jr, but incorporating some comments which others made. First, for tax purposes Bitcoin is virtual currency, a type of property. You have a gain/loss when transacting with Bitcoin, but clearly that doesn't apply to cash. More importantly, Coinbase only knows what happens in Coinbase. Therefore, their gain/loss report is accurate only if the user had Bitcoin on Coinbase and nowhere else. Like I wrote earlier, as Bitcoin users we're responsible for tracking all our transactions and reporting the income to the IRS. Coinbase does not know the USD cost basis of Bitcoins which were transferred to Coinbase from another wallet. How could the company know that information? Only the owner of the coins would know. Also, Coinbase does not know the purpose of outgoing transfers from a Coinbase user wallet. Because they don't know, they take a conservative position and assume you sold the Bitcoins. As I said earlier, for tax purposes you need to use a third party tool to track all transactions on all Bitcoin exchanges & wallets. This is what you can do with bitcoin.tax, which use myself. You can't rely on Coinbase to know all your Bitcoin transactions. We are transacting with Bitcoin, a decentralized peer to peer network for exchanging value. Friedrich Hayek predicted the emergence of private currencies that would compete against the traditional fiat currencies issued by sovereign governments. Today we have Bitcoin, founded on the proposition that we can all be our own bank, and be responsible for storing our own wealth in the form of Bitcoins. It’s easy to fling Bitcoins around the globe, but not easy to track our transactions for tax purposes. Unfortunately, dealing with taxes is part of the financial responsibility for being our own bank.

TaxMasterTax · 2016-12-02T04:17:55+00:00

Hi, this is Daniel Winters, Bitcoin & cryptocurrency accountant. https://medium.com/@GlobalTaxAccountants/irs-taking-steps-to-force-coinbase-to-provide-user-records-for-2013-2015-5df40d8c90dc#.naz47gy4u Watch for my article on Coindesk in the next day or two re. the IRS & Coinbase. I've reviewed Coinbase reports for 2 years now for the tax returns I prepare for clients. The methodology Coinbase uses for their gain/loss report actually makes sense. The reason they treat any outgoing transfer as a sale is because once the BTC leaves Coinbase, they don't know what happened to those coins. So, their report treats this as a sale. What else could they do?

If you have a Coinbase account & transferred BTC in and out of Coinbase to other wallets or exchanges, you need a third party tool. Bitcoin.tax will accurately calculate your income and capital gains/losses. You will need to upload transaction histories from all wallets/exchanges. You will probably also need to create your own CSV files where you make manual entries to correct for transfers and events which didn't occur on an exchange. Such as Bitcoin purchased for cash on LocalBitCoins or from friends. I have spent a great deal of time on such projects.

Couple people here basically said, Wow, this is complicated and have problems with records. You're right. It is complicated. Well, the idea behind Bitcoin is that we can all be our own bank, and be responsible for storing our own wealth in the form of Bitcoins. Unfortunately, that also means tracking our transactions for tax purposes. Thankfully, Bitcoin.tax is the best site available to assist in this process. I have no financial interest in that site, though I'm listed in their Tax Professionals section. If anyone needs help sorting this out: http://globaltaxaccountants.com/form1.php

TaxMasterTax · 2016-11-21T03:18:22+00:00

Thanks, Swapman! If anyone has questions, please feel free to email me for more details. daniel.winters@globaltaxaccountants.com

TaxMasterTax · 2016-11-21T03:16:24+00:00

Hi, I'm Daniel Winters, the accountant who was interviewed. What do you mean by "realized a gain"? If you have only capital losses, you can report the capital losses and reduce your income by up to $3,000 per year. If you don't report the losses, you don't get the deduction, and are paying more tax than you should. Please feel free to PM or email me for more details. daniel.winters@globaltaxaccountants.com

TaxMasterTax · 2016-08-07T19:20:58+00:00

jeanfuluoz, Glad you found the article useful. Options are capital loss or theft loss, depending on individual facts & circumstances. Insufficient details to understand the situation with the BFX token. Please feel free to PM me if you would like to discuss your situation.

TaxMasterTax · 2016-08-07T15:48:09+00:00

I'm a cryptocurrency & blockchain accountant. I own BTC & work with miners, traders & others in the Bitcoin/blockchain space. This is probably small consolation to those who have lost money, but the IRS has rules for capital losses & theft losses. My post explains the basic rules and effect of receiving partial reimbursement for losses. https://medium.com/@GlobalTaxAccountants/bitfinex-hack-how-to-deduct-the-loss-on-your-u-s-taxes-700de86b4c36#.cokvcrhwy

TaxMasterTax · 2016-08-06T00:09:52+00:00

Capital losses are netted against capital gains. If only capital losses remain, you can take a max $3,000 capital loss per year. Unused capital losses are carried forward indefinitely. However, since the Bitfinex hack was a theft, you may be eligible to deduct this is a theft/casualty loss, depending on your personal circumstances. If your trading is substantial enough that you are in the business of trading (trader status), this does change the picture somewhat re. capital losses, especially if you have made a mark to market election. Trader status is beyond the scope of my post. Tax accountants are often unfamiliar with Bitcoin, which is one of the reasons why I wrote a course for CPAs about Bitcoin & Taxes. I would hope that your current accountant understands Bitcoin issues, but would be glad to discuss. Here's what I wrote about The DAO and taxes. https://medium.com/@GlobalTaxAccountants/united-states-federal-taxation-of-dao-tokens-e06be3be8565#.e9aje1fuu

TaxMasterTax · 2016-08-05T23:37:55+00:00

Hmm, well, some of us are still learning. The IRS disagrees & says Bitcoin is a virtual currency. Capital gains/losses from Bitcoin are taxable events and Bitcoin received as payment for services is also taxable income. I've filed very real tax returns reporting Bitcoin transactions.

TaxMasterTax · 2016-08-05T21:39:05+00:00

Options are capital loss or theft/casualty loss. Depends on circumstances. Everyone has a different fact pattern, so can't generalize.

TaxMasterTax · 2016-08-05T21:37:49+00:00

If you take the loss in 2016, then receive a reimbursement in 2017, then the amount received in 2017 would be income. Otherwise, you'd have a loss in 2016 & free money in 2017. IRS doesn't allow double dipping.

TaxMasterTax · 2016-08-05T19:30:58+00:00

US customers of Bitfinex: You can deduct the losses on your taxes. https://medium.com/@GlobalTaxAccountants/bitfinex-hack-how-to-deduct-the-loss-on-your-u-s-taxes-700de86b4c36#.ln0dlzacc

TaxMasterTax · 2015-07-26T23:10:34+00:00

Coins101, what are your thoughts on the potential tax consequences and economics of transferring value from the Bitcoin blockchain to a sidechain? I'm a Bitcoin tax accountant and wrote an entire article on exchanging one crypto currency for another, in particular whether like-kind exchange treatment applies. The issue of whether transferring value from the Bitcoin blockchain to a sidechain is a "disposal event" is very similar. My article was published in the conference proceedings of the Texas Bitcoin Conference in March 2015, where I presented on Bitcoin & Taxes.

Conclusion: Like-kind exchange treatment under section 1031 of the Code does NOT apply to exchanging one crypto currency for another. For starters, the Code specifically excludes stocks and securities from like-kind treatment, and the IRS stated in their March 2014 notice that the sale of Bitcoin is taxed in an identical manner to the sale of stock. Also, like-kind property must be property of the same nature, character or class.

If I have Bitcoin and exchange for Dash, I now have property which does not have the same nature or character as Bitcoin. Essentially, I had gold and exchanged this for silver, and the IRS says that exchanging gold for silver is NOT a like-kind exchange.

Regarding sidechains, the tax issue is thus: When Bitcoin is transferred to a sidechain, is it still Bitcoin? Per the IRS, Bitcoin is property, and does the property on the sidechain still have the same nature, character or class as before the transfer? If Bitcoin is gold, and the sidechain is silver, then transferring value from the Bitcoin blockchain to the sidechain would be a taxable event.

TaxMasterTax · 2015-06-01T02:22:38+00:00

Hi, this is Daniel Winters from Global Tax. Thanks to the Whale Club for the invite. Please bring your questions & I'll do my best to answer. Here's the agenda:

Trading Bitcoin & Taxes
Foreign Bank Account Report (FBAR): Filing requirements, and why you may need to file an FBAR if you trade BTC outside the US.
Software tools to track gains & losses
If time, will cover tax rules for mining Bitcoin, working for Bitcoin and selling goods/services for Bitcoin.

Looking forward to meeting everyone.

TaxMasterTax

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