I’ve warned for years that bitcoin enthusiasts were living in a La-La Land when it comes to taxes and regulations. Now the substance of those warnings is becoming the new reality for bitcoiners.

Originally bitcoin was embraced by tekkies, libertarians, and anarcho-capitalists as a way to escape regulation, and other forms of government control. Their mantra was that ownership of bitcoin through the blockchain was distributed and encrypted and did not require any regulated financial intermediary to keep records or engender trust.

The motto of the bitcoin crowd was, “In Math We Trust.” There are many flaws in this view, but the most obvious, and the one I pointed to repeatedly, has to do with taxes. When you buy a bitcoin for $1,000, and sell or exchange it at a time when the value has increased to, say, $10,000, you are required to report a $9,000 gain on your U.S. tax return. It’s no different than buying and selling IBM or Citigroup stocks.

Just because the bitcoin is digital and encrypted does not make it tax exempt. It’s impossible to know how many bitcoin transactions were properly reported for tax purposes, but my estimate is that the number is quite low. Bitcoiners had a “catch me if you can” attitude toward tax compliance and the IRS.

Now according to this article, the empire has struck back. The IRS was successful in getting a Federal court to order one of the largest bitcoin exchanges to hand over certain customer information including names, addresses, social security numbers, and more.

If the exchanges don’t keep this information, they’re guilty of anti-money laundering violations and all of the accounts can be frozen. If the exchanges do have the information, they’ll hand it over and the IRS will come knocking on the customers’ doors.

The IRS won’t stop there. They’ll play hardball to get the bitcoin customers to reveal names of counterparties or face jail time. This is just the beginning of an all-out assault on bitcoin from the IRS, SEC, FBI, and bank regulators. The best advice to investors is keep away from bitcoin to avoid getting caught in the dragnet.