Crypto-Compliance

Thirty-five years ago, cartoonist Bill Watterson published the very first "Calvin and Hobbes" strip. Calvin, an irrepressible six-year-old who's surely destined for a therapist's couch or an orange jumpsuit (or both), tells his dad he's off to check his tiger trap: "I rigged a tuna fish sandwich yesterday, so I'm sure to have one by now." Two panels later, Calvin's stuffed tiger Hobbes dangles from a rope around his paw in a tree, confirming that yes, in fact, tigers will do anything for a tuna sandwich: "We're kind of stupid that way."

Our friends at the IRS aren't interested in luring tigers out of trees. But they're setting different sorts of traps to lure exotic species of unreported income into captivity. For bait, they're using a simple checkbox on a tax form (which has the added advantage of staying fresh a lot longer than Calvin's tuna fish sandwich).

In 2009, a mysterious figure calling himself Satoshi Nakamoto invented Bitcoin, a decentralized digital peer-to-peer payment network. Since then, Bitcoin and other cybercurrencies have grown into an enormous trading market, averaging north of $4 billion per day. (Ironically, few Americans have ever used the "currency" to actually "pay" for anything.) This speculation can make price charts look more like a roller coaster than an "investment" — for example, from January through February, 2018, Bitcoin plunged by a gut-wrenching 65%.

That volatility spells opportunity for traders who can stomach it. But because they hold their assets in virtual "wallets" that generally don't report activity to the IRS, it's easier for them to "overlook" their gains at tax time than if they were trading more-traditional stocks, bonds, options, or currencies.

Cybercops at the IRS are already making real-world efforts to ferret out cyberincome. In 2017, they subpoenaed Coinbase, the world's most popular exchange, for taxpayer IDs, names, birthdates, addresses, and trading records for about 13,000 customers who traded more than $20,000 on their platform from 2013-2015. But chasing individual exchanges sounds like a giant game of whack-a-mole: as soon as one exchange complies, another pops up with no such constraints.

Now the IRS is casting their net over a broader audience: everyone. Form 1040 already includes a box on Schedule One that asks, "At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" But not everyone files Schedule One. So last week they announced they're moving that question to Page One of Form 1040 itself, right below your address.

This is where the box turns into a what prosecutors call a "perjury trap." At the bottom of Form 1040, it says "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete." In other words, if you "forget" enough cryptogains, you can wind up doing your trading from a place where the most valuable "currency" is Marlboro Reds. (A similar box at the bottom of Schedule B has helped uncover billions in unreported foreign bank income.)

You probably grew up dreaming the future would bring jetpacks and flying cars, not Bitcoin and Facebook. But time and progress march on, and a big part of our work involves anticipating how those changes affect your money and taxes. So you go out and find the new ways to make money, and we'll find the new ways to help you keep it!