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The IRS collects data on Coinbase account holders

152 points by ganlad 9y ago

coldcode 9y ago
Why fear a government agency with aging equipment and lack of employees due to continuous budget cuts by politicians who don't want their buddies audited? The IRS can't keep up with tax law changes and collect much of what they are supposed to collect already much less add new and more complex things to track.
- jmngomes 9y ago
  Maybe it's different where you live, but my experience is that the only people that can afford to not fear the IRS are precisely the "politicians and their buddies"...it wouldn't surprise me at all to see task forces being formed just to identify under-reporting via Bitcoin and issue threatening letters (e.g. pay what is due or say goodbye to any assets you have) to whoever comes up on that list.
  - purple-again 9y ago
    You are right and wrong. It's not 'politicians and their buddies', the line is much much lower than that but there is absolutely a bright line between who pays the IRS and who hires people like I use to be (I sat across from the IRS times innumerable cutting them to shreds) to make sure they pay almost nothing. Anyone that can afford accounting services from the Big 4 (PwC, Deloitte, EY, KPMG) is getting this golden glove treatment. I am sure that there are numerous mid market firms with significant amounts of ex big4 staff that are also helping their clients just as much. Small CPA shops will be hit or miss with mostly misses. My results were 20% experience, 20% skill, 50% training by my Big 4 employer, and 10% fear of my employer escalating the situation if they didn't get a sign off from me (I'm not the one that would get sent to represent the client in tax court). The vast majority of the IRS's work is based on incompetency and fear. Nearly all of the charges they tried to leverage against my clients were false and due to paperwork errors (more often on the client's side than the IRS but not always...not even close to always) that were easy to resolve with minimal penalties and interest. To be clear, they didn't get to throw the middle finger at the IRS and pay nothing, they paid what they owed which was practically never even in the same ballpark as the bill the IRS came at them with. The people who can't hire a professional Tax CPA to sort it out for them get fucked not because they are the only ones paying what they owe but because they are the only ones paying way fucking more than they owe. That's a whole other ethical problem that should be addressed with the IRS.
    - seanmcdirmid 9y ago
      I was hit with a huge tax bill because my foreign tax credit was somehow blown away in my tax return. I was able to refile my forms, and getting an ITIN for my wife, changed my filing status to go from a huge bill to a smaller but significant refund. I did this by myself without a CPA but I knew what I was doing. The IRS was pretty understanding the whole way and quickly understood my situation. They never tried to threaten me or anything like that. It didn’t help that their mail to china kept getting lost, however.
  - patio11 9y ago
    As HN has a lot of people who have complicated financial situations and will eventually get one, I'd like to point folks in the direction of what the IRS' typical first play is if they think you underpaid taxes. They do not send you a threatening letter. They do not throw you in prison. They send you a bill; more formally, a CP3219A. (The IRS says it is not a bill, it is a proposal. In practice, it's a bill you can argue with.) You can see the not-so-hair-raising copy here: https://www.taxaudit.com/irs-letters/irs-letter-cp3219a-sample-1 https://www.taxaudit.com/irs-letters/irs-letter-cp3219a-samp... If you ever get one, you will simply call up your accountant and follow their advice. It's less annoying than owning a bank money... ... providing you didn't commit tax fraud. Here's an example of tax fraud, taken directly from a case where the IRS did, indeed, refer to prosecution: Joe Smith owns a small business. Joe Smith, Inc. paid a Japanese technology company $600k for "technology services", per his tax return. Joe Smith received a $600k wire from Japan, which he did not declare as income. Can you guess the nature of the "technology service"? Yep, it was "Mt. Gox, please technologically service me by buying Bitcoin and then wiring the money back to me. Hah hah hah we are so clever hah hah hah."
    - dsacco 9y ago
      Can confirm this. I run a consulting company and received a letter like that in 2016. They sent a bill with corroborating documentation indicating I’d underpaid by about $2,600. I reviewed my own records, concluded they were right, checked in with my accountant and paid it. It wasn’t threatening at all, nor did I feel like I’d be imminently prosecuted. The IRS, for all its public perception, has actually been sort of a joy to work with, insofar as I’ve had to interact with them at all. That said, I’m always vaguely terrified each year when I deduct the low five figures I’ve spent on bare meral server hardware. Being audited remains in my top ten fears, even though I don’t try to evade taxes. I always wonder if someone at the IRS is going to see my return and say, “He paid this much for ‘Computer Hardware’? That seems fishy.”
      - patio11 9y ago
        For the limited purpose of helping another entrepreneur sleep easy, and not to offer accounting advice: The IRS has to recover ~$1k per IRSian hour to make it worth their time, for reasons which fall fairly straightforwardly from consulting math that you're very familiar with. Consider the set of all companies in the economy which spent $15k last year on "computer hardware." How many IRS hours would be required to read all their returns, given that they are sitting in a pile. How many would, on examination, show a deficiency? How much would those deficiencies be worth, on average? What's your ballpark estimate for how long it takes a government employee to put through a single routine non-trivial work order? Suppose the IRS sits down with a randomly selected small business for a site visit audit. Suppose they budget 2 hours onsite and 8 hours offsite for the audit. How many of those minutes do you think they will spend on that line item, specifically? Does it allow them to do more than ask "I see your return shows $15k on computer hardware. What was the hardware? Can you show me your records?"
- IAmEveryone 9y ago
  So, if you were American, had a coinbase account, and made significant capital gains in the years under investigation, would you not be worried? Because it seems to me like they are very much capable of enforcement, as exemplified by the article. Rich people in the US don’t avoid taxes by stymying investigations they give 5% of their income to Republican candidates and PACs, and have the law changed for them.
  - koboll 9y ago
    Coinbase has already issued tax forms for those who owe capital gains taxes because of cryptocurrency sales. So this isn't in any way new or unexpected.
    - pmorici 9y ago
      I don't think that is correct. They are issuing 1099-K's for people who are accepting Bitcoin payments through Coinbase. They haven't issued any 1099's for people who only have a capital gain from buying and selling.
      - dmeeker 9y ago
        True, but they did add some tools to the tax center tab to make it easy to calculate your gains/losses for tax purposes.
      - AskewEgret 9y ago
        We used Coinbase purely for trading and received a 1099-K
      - dgacmu 9y ago
        The definition not accepting payments is broad, though: if you made a profit trading alt-coins on another exchange and cashed out using coinbase, you get a 1099-K.
  - maxerickson 9y ago
    Lots of people in the circumstance you describe will have made a good effort to pay appropriate taxes.
- deleted 9y ago
  [deleted]
- overcast 9y ago
  You're either trolling, or just being completely naive not to fear the IRS. If there is ANY agency you should fear, it's the Internal Revenue Service. They have infinite resources, and it might take a while, but they will get their money in the end.
  - charlesdm 9y ago
    If you declare taxes, you have very little to fear. If you use potential loopholes, be aware you might need to consult a tax lawyer and go to court. But again, if you are aware of this, aside from your final legal bill, you have nothing to fear.
    - overcast 9y ago
      That's the whole point of this discussion. People aren't declaring their crypto gains.
pulse7 9y ago
My prediction: they will store the history of all Bitcoin transactions and try to identify all wallet owners; when identified they will check if profits were reported and if taxes were paid; if not -> good luck; the same for other countries in the world </end of my prediction>
- IAmEveryone 9y ago
  How is that even a prediction? > store the history of all Bitcoin transactions Bitcoin conveniently does this for them > and try to identify all wallet owners That’s the headline here > check if profits were reported and if taxes were paid Which is the IRS’ job
  - zzz157 9y ago
    >Which is the IRS’ job Ever heard of the 4th Amendment?
    - Karunamon 9y ago
      The 4th amendment does not prevent combing through public data (the blockchain), nor does it prevent going through due process to obtain data (the coinbase order).
    - koboll 9y ago
      Cross-referencing a public ledger is not an illegal search.
    - IAmEveryone 9y ago
      Sure. And so has the IRS, which “persuaded a federal judge”, according to the article. I guess they thought it was a reasonable request to get the data of the 25,000 US citizens who made significant profit with bitcoin in those years, when only a few hundred reported such earnings in total.
      - chrisco255 9y ago
        That's an estimate at best. How many if tbise who profitted actually cashed out?
orev 9y ago
Only a problem if you’re trying to evade paying taxes. Otherwise it’s the same as any other security trading platform.
- deleted 9y ago
  [deleted]
searine 9y ago
Good. Pay your taxes you nerds.
- to3m 9y ago
  That is not a high-status response ;)
fwdpropaganda 9y ago
But but but. Bitcoin is anonymous! /s
castratikron 9y ago
Does that mean Coinbase will give me a 1099 at the end of the year?
- fapjacks 9y ago
  Just pray they don't give you a 1099 with grossly incorrect values like they generously did for me.
  - AskewEgret 9y ago
    Was it a 1099-K? [1] It reports gross payments, not profits. The IRS knows this; it's their form. [1] https://www.irs.gov/businesses/understanding-your-1099-k https://www.irs.gov/businesses/understanding-your-1099-k
    - fapjacks 9y ago
      I know that this is the total transactions and not profits, and the numbers are way, way off. I have a local copy of all my trades, of course, and they match perfectly with the transaction history available on GDAX. But the numbers that Coinbase reported on this 1099-K are completely wrong. They literally put the wrong numbers in the 1099-K. And as one would expect, dealing with Coinbase support is about as much fun as being set on fire. I fear that Coinbase is going to end up costing me a lot of time and money because of their botched accounting.
- chanfest22 9y ago
  They'll start doing this more and more. Just be careful though because the moment you have a single transaction outside of Coinbase, their reports will be incorrect. You may want to consider checking out cross-platform tools like https://www.cointracker.io https://www.cointracker.io which help you keep track of all your cost basis across exchanges and wallets automatically.
davidgh 9y ago
One of the tax implications I’ve often thought about is those that heavily trade among different cryptos. If I buy $10k of Intel, it grows to $15k and I sell it to buy $15k of Google, I owe tax on the $5k gain. Now, perhaps one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. The IRS generally doesn’t like someone to be able to trade assets without recognizing a gain, otherwise it breaks down the fundamental framework upon which the entire tax system is based. The law provides a few provisions for tax free trades, but they are specifically prescribed by the tax law, such as a 1031 exchange between real estate holdings. If you’ve heavily traded between cryptos over the past year with massively appreciating values, I would be worried that the IRS would claim you should have recognized a tax gain with every trade. For some, the ramifications for such a perspective could be huge.
- wyldfire 9y ago
  > one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. This is called a "like-kind trade" which is IMO muddy for cryptocoins [1]. EDIT: oh yes, I see now that you cite 1031, oops. [1] https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth-about-cryptocurrency-and-like-kind-exchanges/ https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth...
  - pdshrader 9y ago
    It's muddy for 2017 and prior years, but the new tax bill limits 1031 "like-kind" exchanges to real estate - so beginning Jan 1, 2018, it's a taxable event every time you sell a cryptocurrency, even if you're receiving another cryptocurrency in return. The link you cited above covers this on page 4. Keep in mind also that like-kind exchanges, if you're going to use them this year and for prior year reporting, require you to claim them explicitly on your taxes [1]. [1] https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills-doom-tax-free-1031-exchanges-of-cryptocurrency/#1f4e7884f58f https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills...
- bpicolo 9y ago
malikNF 9y ago
What would happen if someone was to lose access to their wallets? Would they still have to pay taxes? If my memory serves me right, close to 4 million bitcoins are missing.
- ng-user 9y ago
  If I'm correct, I believe you only pay taxes when you realize the gain. So if you never sell you'll never owe taxes? Can someone confirm this?
  - clay_to_n 9y ago
    Yes, these are capital gains taxes. If you buy a bunch of crypto in a year, and sell none, you owe no capital gains taxes for that year. You only pay capital gains taxes on them in the years where you sell. Keep in mind that in the IRS's eyes, any exchange (like BTC -> LTC) counts as a sale, and so does buying goods with crypto (like buying a video game with BTC).
- YCode 9y ago
  Regardless of whether you lose them you pay taxes when you make a taxable transaction, being either exchanging FIAT to crypto or crypto to a different crypto.
  - jjeaff 9y ago
    If you itemize deductions, and the loss is large enough, you can deduct a loss or theft. So if you mined and then traded $100k in Bitcoin for Ethereum and then the Ethereum was stolen, you would use form 4684 to claim the loss against your taxable income. But I haven't heard of anyone doing this yet and I can imagine it would get some scrutiny from the IRS, seeing as it would be hard to prove a loss or theft.
- chanfest22 9y ago
  You'll want to complete form 4684: https://www.irs.gov/pub/irs-pdf/f4684.pdf https://www.irs.gov/pub/irs-pdf/f4684.pdf and speak with a tax professional. See more about which forms to fill out here: https://www.cointracker.io/faq#tax-forms https://www.cointracker.io/faq#tax-forms
ulkesh 9y ago
So if I made a whole $32 off of my experiment on Coinbase (invested $50 when the price was around $273.59/bitcoin and then sold when the price was around $459.69/bitcoin), will the IRS really care about their cut? I honestly expected some kind of documentation from Coinbase with respect to taxes, such as a 1099-B. I never received such a document. I also read somewhere that the IRS is only coming after people who made $20,000 or more. (Note: I couldn't read this article due to the paywall) Should I be concerned that they'll try to get their $10 from me and then pile on a bunch of penalties?
- cdoxsey 9y ago
  Even if they don't send you a doc you need to pay taxes on your earnings.
  - ulkesh 9y ago
    Of course, it's just what I expected since every other reputable investment business does this. However, my concern is less from that and more from the $30. Will they care?
    - rrdharan 9y ago
      It depends on your definition of “care”. As other comments have noted, you might get a letter. History suggests they would not be likely to attempt to prosecute you for tax evasion. https://www.hrblock.com/tax-center/irs/tax-responsibilities/prision-for-tax-evasion/ https://www.hrblock.com/tax-center/irs/tax-responsibilities/... They do have a limited budget for enforcement and they prioritize accordingly.
      - floatingatoll 9y ago
        The letters described are for correctable human mistakes that can be detected by math crosschecking and fixed by a letter. If they decide you are trying to avoid paying taxes on Bitcoin, and they decide to be upset about that, they would likely initiate an audit instead of a form letter — the serious, investigator, difficult kind.
eximius 9y ago
My only concern is that I bought Bitcoin for a friend because he had trouble setting his account up. Now that tax time is coming up, this has me worried that I'll get singled out because what I claim doesn't match my account. He's filing for his portion of things, so it should all work out in the end, but I don't want to be audited to have to explain that.
- toomuchtodo 9y ago
  Talk to a tax accountant. My gut would tell me you should file to match your account transactions, and your friend should write you a check to cover the incurred tax liability.
- wheelerwj 9y ago
  I am not a lawyer or cpa but it sounds like a similar case when someone may have invested in bitcoin and immediately realized they were over extended. So they decided to reduce their position for a small transaction fee. Unfortunately this was enough to make the trade a small loss and ultimately I don’t know many people who pay taxes on losses.
  - tlrobinson 9y ago
    Am I missing something? You pay taxes on gains, not losses.
- jjeaff 9y ago
  It won't matter if it's a small amount. But you will simply need to show it on your tax calculations. Your 1099k will only have gross numbers. You will do the profit calculations. So the Bitcoin you sent to a friend will be deducted when you make your calculations.
lkbm 9y ago
Could the IRS do me a solid and send me what the capital gains on my crypto currency are? I'll pay the taxes--I just don't want to have to calculate the taxes. I know, I know. Intuit and H&R Block refuse to allow that to happen, but if we could stop prioritizing entrenched industries, that'd be really nice.
- otoburb 9y ago
  >>Could the IRS do me a solid and send me what the capital gains on my crypto currency are? I'll pay the taxes--I just don't want to have to calculate the taxes. Unlike stocks which seem to be entirely traded on exchanges, bitcoin could have been obtained through mining (unlikely, but possible) or a true person-to-person trade/barter. In order to calculate capital gains, one needs to know the cost-basis (i.e. the price you paid to acquire the asset). If bitcoins are deposited into your Coinbase BTC account, there's no way for Coinbase to know what you paid for them, hence difficult/impossible for them to calculate the capital gains.
  - godelski 9y ago
    Couldn't you use the cost of operation? I figure you could either keep track of it yourself or use a standard depreciation rate on equipment and electricity costs (since probably few people tracked that). Would be like running a business, which you kind of are as a miner. But you do make a point that this is a difficult thing and coinbase can't really track it. BUT from what I understand, people leave a lot of coins on exchanges and never transfer them back to personal wallets. Coinbase can track that.
    - jmalicki 9y ago
      "Couldn't you use the cost of operation?" - that's pretty inconsistent with other IRS rules... you probably need to convince the IRS you're mining bitcoin as a business with the intent to profit with all the proof that entails, and then it's likely deductible as a business expense, not a cost basis, similar to how margin interest is not part of your cost basis for buying a stock. See "Basis of Assets" https://www.irs.gov/pub/irs-pdf/p551.pdf https://www.irs.gov/pub/irs-pdf/p551.pdf and "Investment Income and Expenses" https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf None of that covers cryptocurrency directly yet, but looking at how more traditional investments are treated can inspire you to try to do your taxes in the spirit of the rules to avoid likely problems.
timmonsjg 9y ago
without paywall - http://archive.is/cHYve http://archive.is/cHYve
fpgaminer 9y ago
While generally I tend to favor less government involvement, especially when it comes to privacy, I find myself on the other side of the fence here. Ignoring the arguments about what Coinbases is _legally_ required to hand over, it seems like Coinbase withholding this information from the IRS really only favors criminals. If you're a law abiding citizen you're already giving all this information to the IRS yourself. Every Coin-fiat transaction is taxed and must be reported. So there's not much difference for you. It's only if you aren't following the laws that this has an impact on you. So I find myself in _favor_ of the IRS snooping around in Coinbase's business. More compliance means less average taxes. That said, there are nuances. What information exactly gets provided to the IRS is important. Exchange/transaction events? Sure. Money in/out? Ehhh, maybe not. Bitcoin address data? Definitely not. (To be perfectly clear, this is _not_ an instance of "if you have nothing to hide". This is an instance where we're _already_ giving this data to the government, and that's _necessary_ because of our tax laws. There is no equivalence to other privacy cases.)
JumpCrisscross 9y ago
"Chain-splits. These occur when a cryptocurrency branches into two or more versions, as bitcoin and Bitcoin Cash did last year. Investors are often entitled to new coins as a result. Does this right generate taxable income?" Huh.
- Obi_Juan_Kenobi 9y ago
  This is probably the biggest open question, with no good answer. For Bitcoin Cash, if you declare that, what value do you use? Futures price before the fork? Price immediately after? Which exchange? And the price fluctuated wildly, so they all seem arbitrary. The alternative is to claim a cost-basis of $0 when you actually realize those gains, which makes a hell of a lot more sense to me, but the IRS might disagree. Who knows? And what about Bitcoin Gold or the dozens of super-shady forks? Technically they have value, but it's value I don't think I'll realize because they're so shady. You have to go through the trouble of clearing your wallet of 'real' Bitcoin, and then import it to whatever 'totally not going to hack you' wallet software you need to use to claim it. Even if you don't lose your 'real' Bitcoin, all the other shady forks could be stolen. It's clearly not 'real' in the way that traditional securities are.
  - heed 9y ago
    Further, anyone can fork a coin at any time; there could be dozens a year. Am I supposed to keep track of every single fork of every coin I hold? Also what if I haven't imported my private key into the forked coin's wallet? Do I have to report the income right away or only until after I've gained control of the coins?
cinquemb 9y ago
This is not surprising at all, and it's been a long time coming. It will be more interesting when the IRS starts trying to get your electric consumption data (assuming people aren't using solar panels, and/or live in a jurisdiction whose electric companies don't have to hand over such information about their customers to another governmental body) because more people are mining (inflationary) cryptocurrencies and trading that for other "assets" without going through 3rd parties like Coinbase (i.e. needing to upload any forms of government ID). I wonder if this is the kind of stuff the G20 finance ministers will talk about at their upcoming meeting[0], though I kind of doubt it. [0] https://asia.nikkei.com/Politics-Economy/International-Relations/G-20-finance-chiefs-to-discuss-fair-trade-cryptocurrencies https://asia.nikkei.com/Politics-Economy/International-Relat...
KirinDave 9y ago
Of course it does? They're doing a whole KYC thing.
hyprCoin 9y ago
Privacy coins and decentralized exchanges will start rewarding individuals who engage in untraceable tax evasion, which will get easier over time. This puts a negative reward signal on honesty. The current governance system will have to adapt or die. It's not much different than any other disrupted industry, except this one is armed.
dillondoyle 9y ago
I've wondered what to do if I won't or can't prove that I control BTC that I transferred out of coinbase wallet into personal wallets? I will definitely pay my cap gains on the small amount of coin I sold (BTC->USD within coinbase). But I have no idea about first in first out, when is it a wash if I buy more? I don't even want to think about trying to calculate cap gains on purchases made with BTC since the price is almost always different even if I buy BTC on coinbase and use it to buy server time 60 minutes later..
univalent 9y ago
Asking for a friend. If X buys a few bitcoin and then transfers it to a gambling site and proceeds to lose it all does stupid X (the goddamn idiot) owe any taxes? The only way X can show that he/she didn't retain the bitcoin is to show transfers to the gambling website (transfers in and no transfers out, because as I said earlier, X is a dumbass).
saqib_rasool 9y ago
Yep - this is a major pain. The IRS rests the onus on you to best interpret their cryptic guidance on what taxes you need to pay. My team and I are working very hard at http://zenLedger.io http://zenLedger.io on these problems. We have poured over hundreds of hours reading tax codes, talking with CPAs and tax attorneys about this. And we are implementing our best understandings in a tax prep software. It is more difficult than you think. We are making hard default decisions like is the same token move from one exchange to another taxable and so on. If you have specific questions about how we are implementing these, ask your questions and we will give our opinions. We are software developers, not CPAs or Tax Prep professionals. So we are taking an engineering view of making sure every tiny little rule and exception is coded and accounted for in the software. In our more premium version, we will let you change the tax policy that is then applied to your returns. We will prepare the right tax forms but you will take responsibility for sending it. Sorry, it sounds like an advertisement but I wanted to communicate how much pain and work we are going through to address exactly what you are asking. We are very close to a public release.
patrotor 9y ago
I thought it was hilarious that the Coinbase blog announcement of their tax reporting explicitly states that this reporting is completely useless for the 99% of Coinbase users who have transactions on other exchanges and ICO's. https://blog.coinbase.com/new-tax-tools-on-coinbase-4d2598544d9e https://blog.coinbase.com/new-tax-tools-on-coinbase-4d259854... I'm founding www.ZenLedger.io to help crypto investors and CPA's to comply with IRS law, aggregate ledgers across exchanges and wallets, and make everything easier. We also undo things like Coinbase falsely classifying all coin movement off their exchange as a taxable sale when they know it's most likely a non-taxable transfer. So, we help you pay less taxes. Check us out please. We have a great team of developers and business/finance professionals working hard to get it all done for you.
crb002 9y ago
PSA. 1) Withhold 35% of your gains for tax. 2) Realize any losses before the end of December, and reinvest #1.

152 points by ganlad 9y ago

Why fear a government agency with aging equipment and lack of employees due to continuous budget cuts by politicians who don't want their buddies audited? The IRS can't keep up with tax law changes and collect much of what they are supposed to collect already much less add new and more complex things to track.

jmngomes 9y ago
Maybe it's different where you live, but my experience is that the only people that can afford to not fear the IRS are precisely the "politicians and their buddies"...it wouldn't surprise me at all to see task forces being formed just to identify under-reporting via Bitcoin and issue threatening letters (e.g. pay what is due or say goodbye to any assets you have) to whoever comes up on that list.
- purple-again 9y ago
  You are right and wrong. It's not 'politicians and their buddies', the line is much much lower than that but there is absolutely a bright line between who pays the IRS and who hires people like I use to be (I sat across from the IRS times innumerable cutting them to shreds) to make sure they pay almost nothing. Anyone that can afford accounting services from the Big 4 (PwC, Deloitte, EY, KPMG) is getting this golden glove treatment. I am sure that there are numerous mid market firms with significant amounts of ex big4 staff that are also helping their clients just as much. Small CPA shops will be hit or miss with mostly misses. My results were 20% experience, 20% skill, 50% training by my Big 4 employer, and 10% fear of my employer escalating the situation if they didn't get a sign off from me (I'm not the one that would get sent to represent the client in tax court). The vast majority of the IRS's work is based on incompetency and fear. Nearly all of the charges they tried to leverage against my clients were false and due to paperwork errors (more often on the client's side than the IRS but not always...not even close to always) that were easy to resolve with minimal penalties and interest. To be clear, they didn't get to throw the middle finger at the IRS and pay nothing, they paid what they owed which was practically never even in the same ballpark as the bill the IRS came at them with. The people who can't hire a professional Tax CPA to sort it out for them get fucked not because they are the only ones paying what they owe but because they are the only ones paying way fucking more than they owe. That's a whole other ethical problem that should be addressed with the IRS.
  - seanmcdirmid 9y ago
    I was hit with a huge tax bill because my foreign tax credit was somehow blown away in my tax return. I was able to refile my forms, and getting an ITIN for my wife, changed my filing status to go from a huge bill to a smaller but significant refund. I did this by myself without a CPA but I knew what I was doing. The IRS was pretty understanding the whole way and quickly understood my situation. They never tried to threaten me or anything like that. It didn’t help that their mail to china kept getting lost, however.
- patio11 9y ago
  As HN has a lot of people who have complicated financial situations and will eventually get one, I'd like to point folks in the direction of what the IRS' typical first play is if they think you underpaid taxes. They do not send you a threatening letter. They do not throw you in prison. They send you a bill; more formally, a CP3219A. (The IRS says it is not a bill, it is a proposal. In practice, it's a bill you can argue with.) You can see the not-so-hair-raising copy here: https://www.taxaudit.com/irs-letters/irs-letter-cp3219a-sample-1 https://www.taxaudit.com/irs-letters/irs-letter-cp3219a-samp... If you ever get one, you will simply call up your accountant and follow their advice. It's less annoying than owning a bank money... ... providing you didn't commit tax fraud. Here's an example of tax fraud, taken directly from a case where the IRS did, indeed, refer to prosecution: Joe Smith owns a small business. Joe Smith, Inc. paid a Japanese technology company $600k for "technology services", per his tax return. Joe Smith received a $600k wire from Japan, which he did not declare as income. Can you guess the nature of the "technology service"? Yep, it was "Mt. Gox, please technologically service me by buying Bitcoin and then wiring the money back to me. Hah hah hah we are so clever hah hah hah."
  - dsacco 9y ago
    Can confirm this. I run a consulting company and received a letter like that in 2016. They sent a bill with corroborating documentation indicating I’d underpaid by about $2,600. I reviewed my own records, concluded they were right, checked in with my accountant and paid it. It wasn’t threatening at all, nor did I feel like I’d be imminently prosecuted. The IRS, for all its public perception, has actually been sort of a joy to work with, insofar as I’ve had to interact with them at all. That said, I’m always vaguely terrified each year when I deduct the low five figures I’ve spent on bare meral server hardware. Being audited remains in my top ten fears, even though I don’t try to evade taxes. I always wonder if someone at the IRS is going to see my return and say, “He paid this much for ‘Computer Hardware’? That seems fishy.”
    - patio11 9y ago
      For the limited purpose of helping another entrepreneur sleep easy, and not to offer accounting advice: The IRS has to recover ~$1k per IRSian hour to make it worth their time, for reasons which fall fairly straightforwardly from consulting math that you're very familiar with. Consider the set of all companies in the economy which spent $15k last year on "computer hardware." How many IRS hours would be required to read all their returns, given that they are sitting in a pile. How many would, on examination, show a deficiency? How much would those deficiencies be worth, on average? What's your ballpark estimate for how long it takes a government employee to put through a single routine non-trivial work order? Suppose the IRS sits down with a randomly selected small business for a site visit audit. Suppose they budget 2 hours onsite and 8 hours offsite for the audit. How many of those minutes do you think they will spend on that line item, specifically? Does it allow them to do more than ask "I see your return shows $15k on computer hardware. What was the hardware? Can you show me your records?"
IAmEveryone 9y ago
So, if you were American, had a coinbase account, and made significant capital gains in the years under investigation, would you not be worried? Because it seems to me like they are very much capable of enforcement, as exemplified by the article. Rich people in the US don’t avoid taxes by stymying investigations they give 5% of their income to Republican candidates and PACs, and have the law changed for them.
- koboll 9y ago
  Coinbase has already issued tax forms for those who owe capital gains taxes because of cryptocurrency sales. So this isn't in any way new or unexpected.
  - pmorici 9y ago
    I don't think that is correct. They are issuing 1099-K's for people who are accepting Bitcoin payments through Coinbase. They haven't issued any 1099's for people who only have a capital gain from buying and selling.
    - dmeeker 9y ago
      True, but they did add some tools to the tax center tab to make it easy to calculate your gains/losses for tax purposes.
    - AskewEgret 9y ago
      We used Coinbase purely for trading and received a 1099-K
    - dgacmu 9y ago
      The definition not accepting payments is broad, though: if you made a profit trading alt-coins on another exchange and cashed out using coinbase, you get a 1099-K.
- maxerickson 9y ago
  Lots of people in the circumstance you describe will have made a good effort to pay appropriate taxes.
deleted 9y ago
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overcast 9y ago
You're either trolling, or just being completely naive not to fear the IRS. If there is ANY agency you should fear, it's the Internal Revenue Service. They have infinite resources, and it might take a while, but they will get their money in the end.
- charlesdm 9y ago
  If you declare taxes, you have very little to fear. If you use potential loopholes, be aware you might need to consult a tax lawyer and go to court. But again, if you are aware of this, aside from your final legal bill, you have nothing to fear.
  - overcast 9y ago
    That's the whole point of this discussion. People aren't declaring their crypto gains.

pulse7 9y ago

My prediction: they will store the history of all Bitcoin transactions and try to identify all wallet owners; when identified they will check if profits were reported and if taxes were paid; if not -> good luck; the same for other countries in the world </end of my prediction>

IAmEveryone 9y ago
How is that even a prediction? > store the history of all Bitcoin transactions Bitcoin conveniently does this for them > and try to identify all wallet owners That’s the headline here > check if profits were reported and if taxes were paid Which is the IRS’ job
- zzz157 9y ago
  >Which is the IRS’ job Ever heard of the 4th Amendment?
  - Karunamon 9y ago
    The 4th amendment does not prevent combing through public data (the blockchain), nor does it prevent going through due process to obtain data (the coinbase order).
  - koboll 9y ago
    Cross-referencing a public ledger is not an illegal search.
  - IAmEveryone 9y ago
    Sure. And so has the IRS, which “persuaded a federal judge”, according to the article. I guess they thought it was a reasonable request to get the data of the 25,000 US citizens who made significant profit with bitcoin in those years, when only a few hundred reported such earnings in total.
    - chrisco255 9y ago
      That's an estimate at best. How many if tbise who profitted actually cashed out?

orev 9y ago

Only a problem if you’re trying to evade paying taxes. Otherwise it’s the same as any other security trading platform.

deleted 9y ago
[deleted]

searine 9y ago

Good. Pay your taxes you nerds.

to3m 9y ago
That is not a high-status response ;)

fwdpropaganda 9y ago

But but but. Bitcoin is anonymous! /s

castratikron 9y ago

Does that mean Coinbase will give me a 1099 at the end of the year?

fapjacks 9y ago
Just pray they don't give you a 1099 with grossly incorrect values like they generously did for me.
- AskewEgret 9y ago
  Was it a 1099-K? [1] It reports gross payments, not profits. The IRS knows this; it's their form. [1] https://www.irs.gov/businesses/understanding-your-1099-k https://www.irs.gov/businesses/understanding-your-1099-k
  - fapjacks 9y ago
    I know that this is the total transactions and not profits, and the numbers are way, way off. I have a local copy of all my trades, of course, and they match perfectly with the transaction history available on GDAX. But the numbers that Coinbase reported on this 1099-K are completely wrong. They literally put the wrong numbers in the 1099-K. And as one would expect, dealing with Coinbase support is about as much fun as being set on fire. I fear that Coinbase is going to end up costing me a lot of time and money because of their botched accounting.
chanfest22 9y ago
They'll start doing this more and more. Just be careful though because the moment you have a single transaction outside of Coinbase, their reports will be incorrect. You may want to consider checking out cross-platform tools like https://www.cointracker.io https://www.cointracker.io which help you keep track of all your cost basis across exchanges and wallets automatically.

davidgh 9y ago

One of the tax implications I’ve often thought about is those that heavily trade among different cryptos. If I buy $10k of Intel, it grows to $15k and I sell it to buy $15k of Google, I owe tax on the $5k gain. Now, perhaps one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. The IRS generally doesn’t like someone to be able to trade assets without recognizing a gain, otherwise it breaks down the fundamental framework upon which the entire tax system is based. The law provides a few provisions for tax free trades, but they are specifically prescribed by the tax law, such as a 1031 exchange between real estate holdings. If you’ve heavily traded between cryptos over the past year with massively appreciating values, I would be worried that the IRS would claim you should have recognized a tax gain with every trade. For some, the ramifications for such a perspective could be huge.

wyldfire 9y ago
> one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. This is called a "like-kind trade" which is IMO muddy for cryptocoins [1]. EDIT: oh yes, I see now that you cite 1031, oops. [1] https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth-about-cryptocurrency-and-like-kind-exchanges/ https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth...
- pdshrader 9y ago
  It's muddy for 2017 and prior years, but the new tax bill limits 1031 "like-kind" exchanges to real estate - so beginning Jan 1, 2018, it's a taxable event every time you sell a cryptocurrency, even if you're receiving another cryptocurrency in return. The link you cited above covers this on page 4. Keep in mind also that like-kind exchanges, if you're going to use them this year and for prior year reporting, require you to claim them explicitly on your taxes [1]. [1] https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills-doom-tax-free-1031-exchanges-of-cryptocurrency/#1f4e7884f58f https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills...
bpicolo 9y ago

malikNF 9y ago

What would happen if someone was to lose access to their wallets? Would they still have to pay taxes? If my memory serves me right, close to 4 million bitcoins are missing.

ng-user 9y ago
If I'm correct, I believe you only pay taxes when you realize the gain. So if you never sell you'll never owe taxes? Can someone confirm this?
- clay_to_n 9y ago
  Yes, these are capital gains taxes. If you buy a bunch of crypto in a year, and sell none, you owe no capital gains taxes for that year. You only pay capital gains taxes on them in the years where you sell. Keep in mind that in the IRS's eyes, any exchange (like BTC -> LTC) counts as a sale, and so does buying goods with crypto (like buying a video game with BTC).
YCode 9y ago
Regardless of whether you lose them you pay taxes when you make a taxable transaction, being either exchanging FIAT to crypto or crypto to a different crypto.
- jjeaff 9y ago
  If you itemize deductions, and the loss is large enough, you can deduct a loss or theft. So if you mined and then traded $100k in Bitcoin for Ethereum and then the Ethereum was stolen, you would use form 4684 to claim the loss against your taxable income. But I haven't heard of anyone doing this yet and I can imagine it would get some scrutiny from the IRS, seeing as it would be hard to prove a loss or theft.
chanfest22 9y ago
You'll want to complete form 4684: https://www.irs.gov/pub/irs-pdf/f4684.pdf https://www.irs.gov/pub/irs-pdf/f4684.pdf and speak with a tax professional. See more about which forms to fill out here: https://www.cointracker.io/faq#tax-forms https://www.cointracker.io/faq#tax-forms

ulkesh 9y ago

So if I made a whole $32 off of my experiment on Coinbase (invested $50 when the price was around $273.59/bitcoin and then sold when the price was around $459.69/bitcoin), will the IRS really care about their cut? I honestly expected some kind of documentation from Coinbase with respect to taxes, such as a 1099-B. I never received such a document. I also read somewhere that the IRS is only coming after people who made $20,000 or more. (Note: I couldn't read this article due to the paywall) Should I be concerned that they'll try to get their $10 from me and then pile on a bunch of penalties?

cdoxsey 9y ago
Even if they don't send you a doc you need to pay taxes on your earnings.
- ulkesh 9y ago
  Of course, it's just what I expected since every other reputable investment business does this. However, my concern is less from that and more from the $30. Will they care?
  - rrdharan 9y ago
    It depends on your definition of “care”. As other comments have noted, you might get a letter. History suggests they would not be likely to attempt to prosecute you for tax evasion. https://www.hrblock.com/tax-center/irs/tax-responsibilities/prision-for-tax-evasion/ https://www.hrblock.com/tax-center/irs/tax-responsibilities/... They do have a limited budget for enforcement and they prioritize accordingly.
    - floatingatoll 9y ago
      The letters described are for correctable human mistakes that can be detected by math crosschecking and fixed by a letter. If they decide you are trying to avoid paying taxes on Bitcoin, and they decide to be upset about that, they would likely initiate an audit instead of a form letter — the serious, investigator, difficult kind.

eximius 9y ago

My only concern is that I bought Bitcoin for a friend because he had trouble setting his account up. Now that tax time is coming up, this has me worried that I'll get singled out because what I claim doesn't match my account. He's filing for his portion of things, so it should all work out in the end, but I don't want to be audited to have to explain that.

toomuchtodo 9y ago
Talk to a tax accountant. My gut would tell me you should file to match your account transactions, and your friend should write you a check to cover the incurred tax liability.
wheelerwj 9y ago
I am not a lawyer or cpa but it sounds like a similar case when someone may have invested in bitcoin and immediately realized they were over extended. So they decided to reduce their position for a small transaction fee. Unfortunately this was enough to make the trade a small loss and ultimately I don’t know many people who pay taxes on losses.
- tlrobinson 9y ago
  Am I missing something? You pay taxes on gains, not losses.
jjeaff 9y ago
It won't matter if it's a small amount. But you will simply need to show it on your tax calculations. Your 1099k will only have gross numbers. You will do the profit calculations. So the Bitcoin you sent to a friend will be deducted when you make your calculations.

lkbm 9y ago

Could the IRS do me a solid and send me what the capital gains on my crypto currency are? I'll pay the taxes--I just don't want to have to calculate the taxes. I know, I know. Intuit and H&R Block refuse to allow that to happen, but if we could stop prioritizing entrenched industries, that'd be really nice.

otoburb 9y ago
>>Could the IRS do me a solid and send me what the capital gains on my crypto currency are? I'll pay the taxes--I just don't want to have to calculate the taxes. Unlike stocks which seem to be entirely traded on exchanges, bitcoin could have been obtained through mining (unlikely, but possible) or a true person-to-person trade/barter. In order to calculate capital gains, one needs to know the cost-basis (i.e. the price you paid to acquire the asset). If bitcoins are deposited into your Coinbase BTC account, there's no way for Coinbase to know what you paid for them, hence difficult/impossible for them to calculate the capital gains.
- godelski 9y ago
  Couldn't you use the cost of operation? I figure you could either keep track of it yourself or use a standard depreciation rate on equipment and electricity costs (since probably few people tracked that). Would be like running a business, which you kind of are as a miner. But you do make a point that this is a difficult thing and coinbase can't really track it. BUT from what I understand, people leave a lot of coins on exchanges and never transfer them back to personal wallets. Coinbase can track that.
  - jmalicki 9y ago
    "Couldn't you use the cost of operation?" - that's pretty inconsistent with other IRS rules... you probably need to convince the IRS you're mining bitcoin as a business with the intent to profit with all the proof that entails, and then it's likely deductible as a business expense, not a cost basis, similar to how margin interest is not part of your cost basis for buying a stock. See "Basis of Assets" https://www.irs.gov/pub/irs-pdf/p551.pdf https://www.irs.gov/pub/irs-pdf/p551.pdf and "Investment Income and Expenses" https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf None of that covers cryptocurrency directly yet, but looking at how more traditional investments are treated can inspire you to try to do your taxes in the spirit of the rules to avoid likely problems.

timmonsjg 9y ago

without paywall - http://archive.is/cHYve http://archive.is/cHYve

fpgaminer 9y ago

While generally I tend to favor less government involvement, especially when it comes to privacy, I find myself on the other side of the fence here. Ignoring the arguments about what Coinbases is _legally_ required to hand over, it seems like Coinbase withholding this information from the IRS really only favors criminals. If you're a law abiding citizen you're already giving all this information to the IRS yourself. Every Coin-fiat transaction is taxed and must be reported. So there's not much difference for you. It's only if you aren't following the laws that this has an impact on you. So I find myself in _favor_ of the IRS snooping around in Coinbase's business. More compliance means less average taxes. That said, there are nuances. What information exactly gets provided to the IRS is important. Exchange/transaction events? Sure. Money in/out? Ehhh, maybe not. Bitcoin address data? Definitely not. (To be perfectly clear, this is _not_ an instance of "if you have nothing to hide". This is an instance where we're _already_ giving this data to the government, and that's _necessary_ because of our tax laws. There is no equivalence to other privacy cases.)

JumpCrisscross 9y ago

"Chain-splits. These occur when a cryptocurrency branches into two or more versions, as bitcoin and Bitcoin Cash did last year. Investors are often entitled to new coins as a result. Does this right generate taxable income?" Huh.

Obi_Juan_Kenobi 9y ago
This is probably the biggest open question, with no good answer. For Bitcoin Cash, if you declare that, what value do you use? Futures price before the fork? Price immediately after? Which exchange? And the price fluctuated wildly, so they all seem arbitrary. The alternative is to claim a cost-basis of $0 when you actually realize those gains, which makes a hell of a lot more sense to me, but the IRS might disagree. Who knows? And what about Bitcoin Gold or the dozens of super-shady forks? Technically they have value, but it's value I don't think I'll realize because they're so shady. You have to go through the trouble of clearing your wallet of 'real' Bitcoin, and then import it to whatever 'totally not going to hack you' wallet software you need to use to claim it. Even if you don't lose your 'real' Bitcoin, all the other shady forks could be stolen. It's clearly not 'real' in the way that traditional securities are.
- heed 9y ago
  Further, anyone can fork a coin at any time; there could be dozens a year. Am I supposed to keep track of every single fork of every coin I hold? Also what if I haven't imported my private key into the forked coin's wallet? Do I have to report the income right away or only until after I've gained control of the coins?

cinquemb 9y ago

This is not surprising at all, and it's been a long time coming. It will be more interesting when the IRS starts trying to get your electric consumption data (assuming people aren't using solar panels, and/or live in a jurisdiction whose electric companies don't have to hand over such information about their customers to another governmental body) because more people are mining (inflationary) cryptocurrencies and trading that for other "assets" without going through 3rd parties like Coinbase (i.e. needing to upload any forms of government ID). I wonder if this is the kind of stuff the G20 finance ministers will talk about at their upcoming meeting[0], though I kind of doubt it. [0] https://asia.nikkei.com/Politics-Economy/International-Relations/G-20-finance-chiefs-to-discuss-fair-trade-cryptocurrencies https://asia.nikkei.com/Politics-Economy/International-Relat...

KirinDave 9y ago

Of course it does? They're doing a whole KYC thing.

hyprCoin 9y ago

Privacy coins and decentralized exchanges will start rewarding individuals who engage in untraceable tax evasion, which will get easier over time. This puts a negative reward signal on honesty. The current governance system will have to adapt or die. It's not much different than any other disrupted industry, except this one is armed.

dillondoyle 9y ago

I've wondered what to do if I won't or can't prove that I control BTC that I transferred out of coinbase wallet into personal wallets? I will definitely pay my cap gains on the small amount of coin I sold (BTC->USD within coinbase). But I have no idea about first in first out, when is it a wash if I buy more? I don't even want to think about trying to calculate cap gains on purchases made with BTC since the price is almost always different even if I buy BTC on coinbase and use it to buy server time 60 minutes later..

univalent 9y ago

Asking for a friend. If X buys a few bitcoin and then transfers it to a gambling site and proceeds to lose it all does stupid X (the goddamn idiot) owe any taxes? The only way X can show that he/she didn't retain the bitcoin is to show transfers to the gambling website (transfers in and no transfers out, because as I said earlier, X is a dumbass).

saqib_rasool 9y ago

Yep - this is a major pain. The IRS rests the onus on you to best interpret their cryptic guidance on what taxes you need to pay. My team and I are working very hard at http://zenLedger.io http://zenLedger.io on these problems. We have poured over hundreds of hours reading tax codes, talking with CPAs and tax attorneys about this. And we are implementing our best understandings in a tax prep software. It is more difficult than you think. We are making hard default decisions like is the same token move from one exchange to another taxable and so on. If you have specific questions about how we are implementing these, ask your questions and we will give our opinions. We are software developers, not CPAs or Tax Prep professionals. So we are taking an engineering view of making sure every tiny little rule and exception is coded and accounted for in the software. In our more premium version, we will let you change the tax policy that is then applied to your returns. We will prepare the right tax forms but you will take responsibility for sending it. Sorry, it sounds like an advertisement but I wanted to communicate how much pain and work we are going through to address exactly what you are asking. We are very close to a public release.

patrotor 9y ago

I thought it was hilarious that the Coinbase blog announcement of their tax reporting explicitly states that this reporting is completely useless for the 99% of Coinbase users who have transactions on other exchanges and ICO's. https://blog.coinbase.com/new-tax-tools-on-coinbase-4d2598544d9e https://blog.coinbase.com/new-tax-tools-on-coinbase-4d259854... I'm founding www.ZenLedger.io to help crypto investors and CPA's to comply with IRS law, aggregate ledgers across exchanges and wallets, and make everything easier. We also undo things like Coinbase falsely classifying all coin movement off their exchange as a taxable sale when they know it's most likely a non-taxable transfer. So, we help you pay less taxes. Check us out please. We have a great team of developers and business/finance professionals working hard to get it all done for you.

crb002 9y ago

PSA. 1) Withhold 35% of your gains for tax. 2) Realize any losses before the end of December, and reinvest #1.