Cryptocurrency has been on an upward trajectory for years, but the pandemic really seemed to kick things into high gear for the virtual currency boom. Bitcoin recently eclipsed $60,000 for the first time, while Dogecoin is up more than 12,000% from where it was this time last year. There is more money in crypto than ever before, and so it should come as no surprise that the Internal Revenue Service wants its cut from those who are cashing in.
This week, a federal court in the Northern District of California authorized the IRS to serve a John Doe summons on cryptocurrency exchange Kraken as it seeks information about “U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.”
“Gathering the information in the summons approved today is an important step to ensure cryptocurrency owners are following the tax laws,” said the Justice Department Tax Division Acting Assistant Attorney General David A. Hubbert. “Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer.”
“There is no excuse for taxpayers continuing to fail to report the income earned and taxes due from virtual currency transactions,” added IRS Commissioner Chuck Rettig. “This John Doe summons is part of our effort to uncover those who are trying to skirt reporting and avoid paying their fair share.”
The news release from Justice Department regarding the summons makes it clear that Kraken has not engaged in any wrongdoing when it comes to exchanging digital currency. The goal of the summons is just to find people that the IRS believes “may have failed to comply with internal revenue laws.” As a result, Kraken will have to produce records identifying the taxpayers that may fall into this category as well as other documents related to crypto.
If you have any questions about whether or not you should be paying taxes on your digital coins, the IRS has published a notice that you might want to take a look at. Here are some of the highlights:
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Q: How is virtual currency treated for federal tax purposes?
A: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Q: How is the fair market value of virtual currency determined?
A: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.
Q: Is a payment made using virtual currency subject to information reporting?
A: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.