Readers know I’m not a fan of cryptocurrencies. While I recognize the potential benefits of blockchain applications for recording title in areas such as real estate, stocks and bond ownership, and while blockchains with limited participants (called “permissioned” systems) connected by common links in a single industry or supply chain can be efficient, there is still no use case for cryptocurrencies except criminal activity and tax evasion.

I warned years ago that bitcoin would experience a super-bubble crescendo and then crash in a spectacular manner. It did. I also warned that those busy buying and selling bitcoin needed to account for any profits on their tax returns. The IRS does not recognize bitcoin as money; therefore profits on bitcoin are no different than realizing gains on the purchase and sale of stocks.

Of course, the IRS agrees with my analysis. The IRS has already demanded books and records from major bitcoin exchanges and custodians and is issuing demand letters to bitcoin traders who failed to report gains.

Many of these cases can be settled by paying back taxes, interest and penalties. Large players who did not report gains and seek to evade the IRS will be found eventually and some could end up in jail.

According to this article, the IRS is now taking its enforcement efforts a step further by including a new question on Form 1040, Schedule 1. The question reads: “At any time during 2019 did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

If you answer “yes,” you can expect to get more questions from the IRS if you have not reported gains elsewhere on Form 1040. If you answer “no” and that’s honest, no problem. If you answer “no” but you did transact in virtual currencies such as bitcoin, then you may have committed a fraud punishable by five years in prison just by the false answer. That’s in addition to whatever you might owe on the actual transactions.

The IRS is tightening the noose on bitcoin reporting, at least for U.S. taxpayers. Don’t kid yourself about bitcoin “anonymity.” The IRS has your number.

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