THE WALL STREET JOURNAL. **** Saturday/Sunday, August 17 - 18, 2019 |B
WEEKEND INVESTOR
KIERSTEN ESSENPREISOther signs of fraud can be ef-
forts to disguise cryptocurrency
ownership, as by using an as-
sumed name; using a “tumbler”
service that mixes some crypto-
currency with others to obscure
the original source; and lying to a
prior tax preparer—because the
IRS will ask.
If there was fraud, the crypto
owner will need a lawyer to pro-
vide attorney-client privilege. The
owner should probably apply to
the IRS’s Voluntary Disclosure
program, which often levies large
civil penalties but protects
against criminal prosecution.
If the wrongdoing wasn’t fraud-
ulent, the crypto owner can often
file what is called a qualified
amended return, typically through
an accountant. This will avoid
some penalties but not interest.
There is an important excep-
tion for crypto owners who
weren’t fraudulent but are already
known to the IRS. This category
includes people who were outed
when a federal court required
Coinbase, the leading cryptocur-
rency exchange, to turn over in-
formation on about 14,000 cus-
tomers to the agency.
When the IRS contacts wrong-
doers about an audit before they
come forward, Mr. Skarlatos says,
they often face larger penalties
than wrongdoers who weren’t
known to the IRS.
The IRS is focusing on crypto-
currencies because their use is ex-
panding, and enthusiasts often
praise the anonymity virtual cur-
rencies offer. Many trades aren’t
reportable to the IRS by third
parties—unlike sales of securities
such as stock shares, which gen-
erally must be reported to the IRS
by brokerage firms.
An IRS analysis found that for
2013, 2014, and 2015, when more
than 80% of returns were elec-650,000 accounts. Now it has
more than 30 million.
Cryptocurrency advocates are
upset by the IRS’s campaign. They
say the agency hasn’t yet released
long-promised guidance, including
how to pinpoint some fair market
values; which cost-allocation meth-
ods to use; or whether the agency
favors a small exemption for per-
sonal use. Recently, 60% of global
bitcoin transactions were below
$600, according to Coin Metrics, a
cryptocurrency data provider.
“The scary IRS letters tell peo-
ple to ‘accurately’ or ‘properly’
report their transactions, but
what’s that? Maybe they would
have filed if they had clear an-
swers and hadn’t felt over-
whelmed,” says James Foust, se-
nior research fellow with Coin
Center, an advocacy group.
Advocates also point out that
tax reporting is onerous because
the IRS classifies cryptocurrencies
as property akin to stocks or a
home. If someone uses bitcoin tobuy a car or lunch, that is typically
a taxable sale—as it would be if
the person paid in shares of stock.
If the selling price of the bitcoin
is higher than its purchase price,
then the profit is typically taxable
at capital-gains rates. If the selling
price is lower, there may be a de-
ductible capital loss. Frequent
traders can have thousands of
transactions to detail on IRS Form
8949, and cryptocurrencies’ vola-
tility can yield both gains and
losses within a short period.
The IRS will dismiss these ar-
guments, says Jordan Bass, a cer-
tified public accountant in Los
Angeles who says three-quarters
of his tax-prep practice involves
cryptocurrencies, a specialty he
turned to after advising friends
with bitcoin.
“The tax framework has been
clear since 2014,” he says. “The
IRS isn’t going to impose terrible
penalties on good-faith efforts,
but it will try to make an example
of bad actors.”The IRS Is Coming
For Your Bitcoin
Cryptocurrency investors who aren’t in
compliance with tax rules need to act quickly
TAX REPORT| LAURA SAUNDERS
The Internal Reve-
nue Service is on the
war path against
Americans who ha-
ven’t reported in-
come from cryptocur-
rencies like bitcoin.
In late July, the IRS said it had
started to send warning letters to
more than 10,000 people who
may not have complied with tax
rules on virtual currencies.
Agency officials have said crimi-
nal tax indictments involving
cryptocurrencies are expected
soon, and other enforcement let-
ters are going out.
Tax specialists are urging
crypto users who aren’t in compli-
ance to act quickly. While coming
clean involves a maze of tricky de-
cisions, ignoring the agency could
cost a crypto holder dearly.
“I tell them, ‘It’s time to put
your running shoes on.’ You must
get to the IRS before they find
you, especially if you got a letter,”
says Bryan Skarlatos, a criminal
tax lawyer with Kostelanetz &
Fink in New York.
Dealing with the IRS disclosure
maze is Mr. Skarlatos’s specialty:
He guided nearly 2,000 U.S. tax-
payers through it when they con-
fessed secret offshore accounts
between 2009 and 2018. He per-
formed triage for more, telling
those with cases that wouldn’t
land them in prison about sim-
pler solutions.
The IRS’s crypto crackdown has
similarities with its offshore-ac-
count campaign. Mr. Skarlatos has
handled about a dozen high-dollar
cryptocurrency cases.
Mr. Skarlatos says people in
possible violation of IRS rules
should first look for signs of tax
fraud. It must involve intentional
disobedience of the law. One clear
sign is a large amount of unpaid
tax, say above $15,000, he adds.
tronically filed, fewer than 1,
e-filed returns each year reported
transactions appearing to use vir-
tual currencies. Coinbase said at
the end of 2013 that it hadGlobalbitcointransactions*Source: Coin Metrics*30-day moving average400,0100,200,300,2013 ’14 ’15 ’16 ’17 ’18 ’Transactions
under$Transaction
anysizeGet a clearer picture of the 401k fees
you might be paying.
Yourretirementsavingsshouldstayinyourpocket,whichiswhyTDAmeritradeprovidesthe 401k fee analyzer tool
poweredbyFeeX.Itfindsoutifyou’repayingunnecessaryfeesonyourold401kandhelpsyoudecideifrollingoveris
therightmoveforyourretirement.
Visit tdameritrade.com/401kfees to learn more.
Feesareonlyoneconsiderationwhenmakingthedecisiontorollover.Andincertainsituations,feesmaybehigherinarolloverIRA.Reviewyourretirement plan rollover choices at
tdameritrade.com/rollover.The401kfeeanalyzertoolisforinformationalandillustrativepurposesonly,anddoesnotconstituteadvice.TDAmeritrade,Inc.,memberFINRA/SIPC.
©2019TDAmeritrade.