Now Is The Time To Confirm Your Bitcoin Is Tax Compliant

The value of Bitcoin has surged 125% in 2017 alone.  In addition to its value ascent, it has also gained in legitimacy.  While it was once the currency of choice on the illicit Silk Road “dark web”, shut down by the U.S. Department of Justice in 2013, Bitcoin is now accepted for payments by Amazon.com and other mainstream businesses.  Whether you’ve weathered the Bitcoin roller coaster or invested recently, you must ensure IRS compliance for Bitcoin.

The IRS has taken an interest in Bitcoin for various reasons.  First, Bitcoin is largely unmonitored and stands apart from the traditional structure of U.S. banking with 1099 forms and regular reporting.  There is a huge mass of Bitcoin value that is relatively unknown to the IRS, and gains in value are essentially hidden from the IRS, and the IRS doesn’t like that.  In addition, Bitcoin has a large potential for tax non-compliance, both because its very nature is anonymous, and because Bitcoin holdings give rise to significant IRS reporting (the “FBAR” form, IRS Form 8938, IRS Form 8949, capital gains taxes, etc.) and many Bitcoin owners don’t heed (or even know) the reporting requirements.

In November 2016, the IRS obtained a federal court authorization to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform.  The IRS has in the past successfully used the “John Doe” summons to obtain information from financial institutions (e.g., UBSHSBC and Cayman Islands banks) for a broad class of U.S. taxpayers who are not individually named but whom the IRS has reason to believe may have utilized the financial institution to improperly evade tax.  The John Doe summons upon Coinbase seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user.  A recently filed Affidavit by an IRS agent in the Coinbase enforcement litigation revealed that in 2015, only 802 taxpayers revealed Bitcoin information to the IRS on Form 8949, which is the form applicable to capital gains and losses.  Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and other virtual currencies like Ethereum and Litecoin.

Bitcoin’s anonymity feeds its non-compliance, and there are many opportunities to run afoul of tax law and IRS requirements, intentionally or inadvertently.  One issue is the failure to report income with respect to Bitcoin.  In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions.   In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc.  This means that if Bitcoin is sold for a profit, that profit is income and is subject to capital gains tax.  The income is reportable on IRS Form 8949 which is then attached to Schedule D of Form 1040.  If you exchange your Bitcoin for goods or services, that too is a taxable event, as the IRS considers you to have earned income on the value of the good or service, less your cost basis in the Bitcoin (i.e., your Bitcoin purchase price).

If you are audited by the IRS regarding Bitcoin, you may have to show multiple cost bases for multiple transactions.  Proper record keeping with respect to Bitcoin is essential.  The IRS could take the position that your cost basis in your Bitcoin is zero, and you would pay tax on the full value of the Bitcoin on the date of the transaction, unless you can provide records of your purchases of Bitcoin.

In addition to income tax issues on Bitcoin income, there are reporting issues irrespective of income.  Because a Bitcoin wallet would be considered by the IRS to constitute an “account”, if you hold your Bitcoins in foreign wallets or on foreign Bitcoin exchanges, then foreign account reporting requirements are triggered, including the FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) and IRS Form 8938 (Statement of Specified Foreign Financial Assets).  If you invested in a foreign fund that invested in Bitcoin, the IRS may consider the fund to be a “PFIC” (Passive Foreign Investment Company), which has its own tax methodology, and IRS Form 8621 would be due.  Penalties for non-reporting foreign accounts are significant, including potentially 50% of the value of the account.

Clearly, the IRS’ increased interest in Bitcoin necessitates proper compliance with respect to Bitcoin assets.  The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including via a pre-emptive voluntary disclosure (offshore or domestic) of digital currency income and accounts.  A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues, along with peace of mind and finality.

Please contact us to discuss IRS compliance for Bitcoin assets, along with other tax issues.

Live Webinar Featuring Asher Rubinstein: FBAR, US Reporting and IRS Compliance for Offshore Assets

Asher Rubinstein will be a featured speaker in an upcoming Strafford live webinar, “FBAR and U.S. Tax Reporting and Compliance Requirements for Foreign Assets” scheduled for Tuesday, June 20, 2017 at 1pm EST.  We have a limited number of complimentary registrations for clients and friends of the firm.

The IRS has made modifications over the past several years to the programs that allow for late reporting of previously undisclosed offshore assets.  At the same time, the IRS continually reaffirms its commitment to cracking down on U.S. taxpayers failing to disclose foreign assets. Taxpayers and their advisers must act quickly to take advantage of the benefits of a pre-emptive disclosure, before the IRS learns of the foreign asset from a foreign financial institution, a foreign banker, FATCA (Foreign Account Tax Compliance Act) report, tax treaty with a foreign government or alternative means of discovery.

The two most significant programs aiding taxpayers with unreported foreign assets are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Procedures for domestic (SDOP) and foreign (SFOP) residents.  Taxpayers may benefit from substantially reduced or no penalties for failure to report offshore accounts and assets.  However, taxpayers and their advisors must be aware of the risks in each of the programs.  The penalties imposed upon taxpayers who willfully fail to disclose offshore assets are extremely punitive.

Taxpayers and their advisers must evaluate whether a disclosure program will help a taxpayer avoid increased IRS penalties, and whether the taxpayer is eligible to enter one of the programs.  Eligibility is very fact-specific.  If eligible, counsel must guide the taxpayer in meeting the very specific information requirements of the disclosure program.  The OVDP, SDOP and SFOP may end at any time without notice, at which point the taxpayer may face the full measure of penalties (including criminal consequences).

The Webinar panel will provide taxpayers, legal counsel and tax advisers with the tools necessary to navigate the new rules regarding the FBAR and offshore voluntary disclosure programs.

We will review these and other key issues:

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.

For more information about this Webinar, please visit the Webinar program description.

Contact us with any questions about this Webinar or other offshore reporting and IRS compliance issues.

 

Credit Suisse, More Secret Bank Accounts and the Israeli Connection

In 2014, Credit Suisse pleaded guilty in U.S. federal court to facilitating tax fraud by Americans via secret bank accounts in Switzerland.  This was among the largest guilty pleas ever by a foreign bank, and Credit Suisse agreed to pay $2.6 billion in fines to the U.S. and New York State.  (Our previous report from 2014 is here, along with a Bloomberg Businessweek article that quoted Asher Rubinstein in 2014.)  Now, Credit Suisse is again facing similar allegations, this time for the bank’s “Israel desk” facilitating tax fraud by Israeli-Americans.

The current accusations stem from the Department of Justice prosecution of Dan Horsky, who held joint U.S. and Israeli citizenship and kept millions of dollars in cash and stock accounts at unreported Credit Suisse accounts in Switzerland.  Mr. Horsky pled guilty, cooperated with DOJ and provided information about Credit Suisse that could result in a new prosecution or punishment of Credit Suisse.  Following the 2014 guilty plea, a new prosecution will likely have severely negative results for Credit Suisse and other U.S.-Israeli taxpayers with unreported secret bank accounts at Credit Suisse and other banks.

We have written extensively about non-compliant foreign accounts in Switzerland, Israel and other jurisdictions around the world.  There is a limited opportunity to bring such accounts into U.S. tax compliance, but only if the IRS does not already know about the accounts.  If Credit Suisse, as part of an investigation, settlement, fine or penalty, reveals the names of its account holders to DOJ, it would be too late for the account holders to make a pre-emptive disclosure in order to avoid prosecution, severe penalties and even jail.  Banks have routinely disclosed the identities of their account holders in order to settle charges of facilitating tax fraud, including UBS, Credit Suisse and Bank Leumi.

If you have unreported foreign accounts, commonly known as secret bank accounts, contact us to discuss your options.

Please also see the following related articles:

Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, by Asher Rubinstein, published in Tax Notes International

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?

The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

2016: The Offshore Year in Review

Offshore account

The year 2016 was an epic year in the offshore world due to the leaks of confidential offshore financial information known as the “Panama Papers”.  In addition, in 2016, more countries began to report offshore financial information to the IRS under FACTA (the Foreign Account Tax Compliance Act).

Also in 2016, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”, moving beyond Switzerland to other foreign jurisdictions.  “Going offshore” for the purposes of hiding money from the IRS is now impossible.  Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant.


Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

  • In 2016, the International Consortium of Investigative Journalists (ICIJ) released a massive amount of once-confidential offshore information known as the “Panama Papers”.  The files included sensitive foreign banking information, including identities of owners of offshore accounts, secretive corporations and other entities established by Panamanian law firm Mossack Fonseca.  Also in 2016, ICIJ released data from the Bahamas including names of directors, shareholders and “nominees” of shell companies, trusts and foundations in the Bahamas.  These most recent breaches of offshore secrecy followed the 2013 release of information, also by ICIJ, regarding offshore accounts in the British Virgin Islands (BVI) and Singapore, the 2008 theft of banking data at HSBC in France, and the 2006 leak at LGT Bank in Liechtenstein.  The lesson, once again, is that hacking, leaks and whistle blowers are as significant a threat to banking secrecy as laws such as FATCA (the Foreign Account Tax Compliance Act) and inter-governmental cooperation and exchange of information.  Another lesson is that offshore asset protection should not — indeed, cannot — be dependent upon “confidentiality” and “secrecy”, simply because offshore “secrecy” no longer exists.
  • During 2016, the IRS and DOJ continued to investigate and prosecute many U.S. taxpayers with undeclared offshore assets. U.S. taxpayers with undeclared foreign accounts in Switzerland, Cayman, Belize, India, Israel, Singapore, Panama and other jurisdictions have been targeted.  In 2016, the IRS collected a $100 million penalty from a U.S. taxpayer who hid his Swiss account.
  • In 2016, most Swiss banks settled with DOJ and reported accounts with a U.S. nexus.  In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing the identities of their American account owners.  Clients of these banks who have not already come into IRS compliance can make a voluntary disclosure of these accounts, but will pay increased penalties in return for no criminal exposure (but not if the IRS already has their names!).  Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now extinct.  Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients.  New legislation in Switzerland imposes penalties on a Swiss bank or bank employee who is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.
  • All reputable countries are agreeing to the exchange of tax information and banking transparency.  In 2016, Singapore implemented FATCA.  In 2015, Luxembourg began exchange of bank depositor information.   Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.   During 2016, over 100 countries (and hundreds of thousands of foreign banks and other financial institutions)  have agreed to sign on to FATCA and automatically report foreign account and income data to the IRS, including: India, Cyprus, Singapore, Liechtenstein, Switzerland, Barbados, Bahamas, Hong Kong, Brazil, Jersey, Guernsey, Cayman, etc.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • The reach of the U.S. Government to foreign banks is undeniable.  In 2016, Bank Julius Baer settled with DOJ, paying a fine of $547 million.  Also in 2016, two Cayman Islands financial institutions pleaded guilty to conspiring to hide millions from the IRS in Cayman accounts.  The IRS is investigating HSBC, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Caribbean.  During 2016, the IRS focused on Panama, Singapore and the Cayman Islands.  DOJ also issued summonses to U.S. banks for information on U.S. correspondent accounts used by owners of foreign accounts to access funds.  Banks in Switzerland, Israel, India, Singapore and the Caribbean are currently under investigation.  We expect more banks, in other countries, to be targeted in 2017.  Again, the fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • In positive news, the IRS issued recent guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR.  The new penalty structure allows for a single penalty, rather than multi-year penalties.  In addition, the penalties should not exceed the value of the foreign account.  The new guidance is applicable to cases currently in audit.
  • Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination.  This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer or his bank to provide his offshore account records even if those records are incriminating.  Prosecutors may then use those records to prove commission of tax crimes, including failure to file bank disclosures, filing false tax returns, tax evasion and tax fraud.
  • In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant.  We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014.  The 2014 OVDP is still in effect (although the IRS warns that it may close the program at any time).  We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.  In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for non-willful conduct.  The Streamlined procedures have greatly reduced penalties (5% for U.S. residents; 0% for non-residents).  We can advise you on which program is best for you.  The penalties within the OVDP are usually less than if the IRS discovers the foreign account via audit, investigation or information the IRS receives from a bank or foreign government.
  • Within the OVDP, the penalty is 27.5% of the highest value of the foreign asset(s).  However, this penalty increases to 50% if the foreign financial institution housing the foreign account is under investigation or is cooperating with DOJ/IRS.  There are approximately one hundred foreign banks on the so-called “naughty bank” list, most but not all in Switzerland.  On November 15, 2016, the “naughty list” increased to approximately one hundred and fifty.  The new additions are foreign “facilitators” of U.S. tax fraud, i.e., the foreign bankers, lawyers, trustees, investment advisors and other service providers who worked with U.S. clients to hide assets and income from the IRS.
  • Clients should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, New Jersey and California, have formal programs for offshore accounts.  Other states, including Connecticut, had a formal program in the past, and we have been successful in applying the favorable terms of the past programs to current clients.  The IRS shares information with state governments, including that a federal tax return was amended to report foreign income.  Please contact us regarding tax compliance on the state and federal levels.
  • Against the background of the U.S. offensive against undisclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts.  In 2016, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign institutions to take their business.  While many foreign banks no longer welcome U.S. account holders, we have relationships with foreign institutions which still service our clients’ tax-compliant accounts.

This year has been an unprecedented year both domestically and offshore.  We can assist you in navigating through the changing offshore world and advise you regarding offshore (and onshore) assets.

 

Search


Categories

as seen onbloombergcnbcforbesnytimeswall street
Menu