The IRS Is Cracking Down On Cryptocurrency Transactions. Here’s What That Means For You

By RYAN DEROUSSEAU March 5, 2018

Investors aren’t the only ones interested in big cryptocurrency profits.

The IRS has a growing curiosity about them too.

And that could spell trouble for cryptocurrency investors who made out like bandits in 2017, when Bitcoin and altcoins enjoyed a break-out year.

Recently, the popular cryptocurrency exchange Coinbase capitulated to the IRS and the courts and announced that it would send requested transaction information on approximately 13,000 of its users. This is to comply with a court order issued in November.

“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,” the company wrote in its announcement to customers.

For Coinbase, this move represents the latest in a string of bad news for the exchange. A few weeks ago, a number of users expressed their frustration after the exchange inadvertently charged them multiple times for past purchases. Then last week, competitor Circle bought the exchange Poloniex, in an effort to compete with Coinbase’s scale.

But for cryptocurrency investors, this may be even worse news, as the IRS’s victory represents the latest blow to the perceived independence of cryptocurrencies, which are in the crosshairs of a growing number of regulators around the world.

Few Taxpayers are Reporting Their Cryptocurrency Gains
Last year, the 10 best-performing cryptocurrencies posted average price gains of 14,000%, versus the 20% returns for the stock market.

Yet few taxpayers appear to be reporting their crypto trades.

Last month, Credit Karma said that of the more than 250,000 people who’ve already turned in their 2017 taxes via Credit Karma’s filing service, fewer than 100 reported any cryptocurrency transactions. That’s less than 0.04%.

To be sure, one of the big reasons why many investors dabble in cryptocurrencies in the first place is to avoid government regulations and intrusions. So you wouldn’t expect cryptocurrency investors to be that forthcoming.

However, they may not have much of a choice going forward, as the IRS appears more aggressive in ferreting out crypto capital gains.

What the Coinbase Decision Means
Coinbase said it will provide taxpayer IDs, names, and cryptocurrency transaction records for traders who initiated transactions of $20,000 or more on the exchange between 2013 and 2015.

“That only 800 to 900 taxpayers reported gains related to Bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains,” Judge Jacqueline Scott Corley wrote in November, when detailing her ruling in favor of the IRS.

It’s also another jab at the faulty notion that investing in Bitcoin and altcoins is completely anonymous.

Because the virtual coins are tracked on digital ledgers, every single transaction is marked and stored. And more regulators have begun to crack down on cryptos’ libertarian dreams.

The Tax Implications of Investing in Cryptocurrencies
Coinbase’s announcement should serve as reminder of how the IRS treats cryptocurrencies.

Investments in Bitcoin and altcoins are treated as property, not cash. So if you sell your virtual coins at a profit, you face capital gains taxes. And if you sell cryptocurrencies that you’ve held for less than a year, your capital gains are considered short term in nature, which means they will be taxed as ordinary income.

What this means is, you must outline every single cryptocurrency transaction you make and report it to the IRS. That’s true whether you are trading the cryptos as investments or spending them to buy a pack of gum or redesigning your home.

As MONEY detailed in November, if you purchase a $3,500 bedroom set using a portion of a bitcoin you bought in 2016 for $200, then the gain is $3,300. That would be taxed at a 15% long-term capital gains rate, leading to a $495 tax hit.

If you spend coins that you’ve held for less one year, however, then it’s treated as short-term gains, and taxed at regular income rates, which reach as high as 39.6% for the 2017 tax year.

Florida passes law making crimes with bitcoin money laundering

Luke Parker, 09 May 2017 -Bitcoin

House Bill 1379 recently passed in Florida, which defines virtual currency and prohibits its use in laundering criminal proceeds. The bill adds the term “virtual currency” to the definition of “monetary instruments” under Florida’s Money Laundering Act. The legislation is currently in the hands of the State’s Governor and is expected to be signed soon.

The Act defines digital currency as a “medium of exchange in electronic or digital format that is not a coin or currency of the United States or any other country.” Previously, the Act only applied money laundering to legacy financial transactions of various types, including bank deposits, investments, and wire transfers.

The resulting outcome is that criminals using cryptocurrencies will be charged with money laundering as well as the underlying crimimal activity. “Cyber criminals have taken advantage of our antiquated laws for too long,” claimed Democratic House Representative Jose Felix Diaz, a sponsor of the bill.

“Bitcoin bypasses the traditional banking system, and our state’s laws simply had not caught up to the upsurge in criminality in the world of cybercurrency.”

– Florida Representative Jose Felix Diaz

Passing this legislation brings to rest a multi-year-long series of court proceedings and uncertainty centered around the arrest of a seller of bitcoins. The bill is a direct response to the failure of Miami-Dade police to be able to prosecute Michell Espinoza, a Miami-based website designer and LocalBitcoins seller who was charged with illegally transmitting and laundering $31,000 worth of bitcoins near the end of 2013.

At the time, undercover detectives in the Miami PD worked with the Secret Service to set up a sting operation on sellers at the popular, face-to-face Bitcoin exchange. The undercover police officers initially bought a small amount of bitcoins from Espinoza, worth $1,000 at the time, and the officers claim that they told Espinoza specifically that they intended to use the money “to buy stolen credit-card numbers,” which is an existing crime in Florida.

Espinoza was arrested in a police sting involving an agreement for $30,000 in bitcoin. Days later, another Localbitcoins trader, Pascal Reid, was arrested in a second sting operation for the same amount by the same officers. Both Espinoza and Reid pleaded guilty to “acting as an unlicensed money broker,” similar to the charges Charlie Shrem faced for his arrest as CEO of BitInstant in January 2014.

The defence teams for both Reid and Espinoza filed to have the money laundering charges dismissed in their cases, on the grounds that under IRS guidance, bitcoin is not legal money. They both wound up accepting a plea deal, and were sentenced to probation. Reid went on to teach law enforcement officers at the Miami PD about how Bitcoin works as part of the plea deal.

What followed for Espinoza was a dramatic series of well-publicized court proceedings that took two and a half years to conclude, ending with all charges being dropped. The case made headline news as there were so few laws on the books about Bitcoin in any US state, and Florida was the first to arrest anyone for what appeared to be merely selling a cryptocurrency.

“State prosecutors are improperly applying Florida statutes regulating ‘money service businesses’ to individuals conducting peer-to-peer sales of bitcoins.”

– Brian Klien, The Bitcoin Foundation’s Legal advocate

It was at Espinoza’s May 2016 hearing that defense lawyers told Judge Teresa Pooler that neither governments nor banks “back” Bitcoin, so Bitcoin regulation remains lacking, and clear definitions were yet to be made in most states.

Judge Pooler cleared Espinoza of all charges two months later, citing a lack of regulations. “This court is unwilling to punish a man for selling his property to another,” she said during the verdict, “when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”

“This court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that bitcoin has a long way to go before it is the equivalent of money,” Pooler wrote in an eight-page dismissal order. The judge then called for today’s legislative outcome.

Noting that the state could prevent further cases like Espinoza’s from a similar conflict, she said: “There is unquestionably no evidence that the defendant did anything wrong, other than sell his bitcoin to an investigator who wanted to make a case.”

“Hopefully, the Florida legislature or an appellate court will define ‘promote’ so individuals who believe their conduct is legal are not arrested.”

– Judge Pooler

The outcome of the 2016 ruling has likely set a precedent that can already be felt in other states. In this year alone, eight more states have worked on bills that concern bitcoin and blockchains. While most states have simply taken the opportunity to define Blockchain technology and its benefits, Hawai’ian lawmakers have started to define and regulate Bitcoin and its money transmitter status.

Ultimately, it is up to each state how they classify Bitcoin. All the while, new options continually arrive, such as the Sweden-based LocalBitcoins and the decentralized, peer-to-peer bitcoin exchange Bitsquare that give users in those states a way to buy and sell bitcoins without any regulations.

Florida Bill Would Legally Recognize Blockchain Signatures, Smart Contracts

By: Nikhilesh De
Jan 11, 2018 at 07:00 UTC | Updated Jan 11, 2018 at 07:14 UTC


A lawmaker in Florida has introduced a bill that, if passed, would create a legal foundation for blockchain data and smart contracts in the U.S. state.

House Bill 1357 introduces multiple stipulations that blockchain ledgers and smart contracts be treated as legally-binding methods of data storage – provided that such measures do not break any pre-existing laws or regulations.

Notably, the bill states that a “record or contract that is secured through blockchain technology is in an electronic form and is an electronic record,” and confirms that a signature recorded through a blockchain also qualifies as a valid electronic signature.

As a result of these qualifications, the bill outlines that, if a person uses a blockchain to secure interstate or foreign commercial ventures, it would not impact ownership rights. In other words, if someone used a blockchain ledger to store information, the bill would legally recognize that person’s rights to that information.

 Similarly, the bill states:

“A contract may not be denied legal effect or enforceability solely because: 1. An electronic record was used in the formation of the contract [and] 2. The contract contains a smart contract term.”

If signed into law, the bill would make Florida the latest state to recognize blockchain records and smart contracts. Last year, Arizona passed a similar measure, with identical notes on confirming blockchain records as electronic records, as well as giving smart contracts legal force.

A slightly different bill in Vermont, when passed in 2016, allowed for the use of blockchain-based data as evidence in court.