As we know, blockchain technology is premised on anonymity. Transactions are public, but linked only to an electronic address. Anonymity, though, is the main fuel for underground economies, whose transactions are currently conducted primarily through cash. If cryptocurrencies were to replace cash as the preferred medium of exchange, they could potentially expand the underground economy because of associated anonymity and convenience.
The U.S. Government recognizes this. Steven Mnuchin, Secretary of the U.S. Treasury, said recently that Bitcoin could become “the next Swiss bank account.” And the Internal Revenue Service estimates that it loses about $500 billion annually because of unreported wages alone. But although the IRS has been pushing to break the anonymity of cryptocurrencies, the agency has hit a hurdle: From 2013 to 2015, less than 900 people each year reported Bitcoin transactions on their taxes.
That said, every purchase you make with cryptocurrencies, is supposed to be reported. So whether you’ve used Bitcoin — or any other coin — as an investment or a currency, in their eyes, you owe taxes on it. Let’s say you’ve held Bitcoin for less than a year and sell them, that cash could be taxed as income. If you’ve held for more than a year, it could be taxed as a capital gain — which run up to 20%. Furthermore, adding on transaction and accounting fees could raise costs to a staggering 60%.
Exchanges are facing trouble, too. Last year the IRS served a summons to Coinbase. In the summons, the agency called for the records of over 14,000 users who “bought, sold, sent, or received at least $20,000 worth of Bitcoin in a given year.” A federal court ultimately ruled in favor of the IRS, but the tax status of those transactions is still unknown.
Moving forward, things have looked slightly better. A bipartisan bill, “The Cryptocurrency Tax Fairness Act,” was presented to Congress this past September. The bill seeks to create a tax exemption for transactions under $600. Regardless, though some remain hopeful for amnesty, it looks like the IRS is going to continue to pursue a cut of the cryptocurrency market — only the future will tell how successful they are.