Bitcoin is the leading cryptocurrency anywhere in the world, including in the U.S. Millions of people and institutions are using Bitcoin today.
Whether it is for buying, selling, or trading, Bitcoin’s uses are varied, hence its attractiveness. Bitcoin holds value because its supply is limited while the demand is high and ever-growing.
Today, cryptocurrencies like Bitcoin have become more common. Many people and institutions are now using Bitcoin for different purposes.
The growing popularity of these digital currencies has a significant impact on investors and nowadays you can use Immediate Edge to trade in bitcoin.
Can the IRS Trace Your Bitcoin? Bitcoin and IRS
Recently, the government, through the IRS, has been keen on introducing specific regulations for Bitcoin.
Although the government does not consider Bitcoin legal tender, it has imposed particular rules on its use. Overall, the IRS has been very stringent in ensuring it keeps track of Bitcoin transactions.
Traditionally, the IRS adopts the voluntary compliance notion in matters of taxation. It implies that the IRS anticipates that every taxpayer will report all taxable income and transactions in line with the law.
Failure to do so, the IRS has mechanisms to find out and meet the appropriate penalties.
The same case applies to Bitcoin. The IRS considers Bitcoin an asset. And like other traditional assets, Bitcoin users should pay capital gains taxes.
Therefore, the IRS expects every cryptocurrency user to report their Bitcoin transactions like all other taxpayers. Failure to do so could prompt the IRS to come for you.
How IRS Tracks Bitcoin?
The IRS can track Bitcoin in two ways.
Through Cryptocurrency Exchanges
Most Bitcoin users use a cryptocurrency exchange. These cryptocurrency exchanges act as brokers or intermediaries between you as the seller or buyer and the other end.
Most people don’t realize that some of these exchanges have the government’s registration. In that sense, they are legally obliged to disclose cryptocurrency transactions on their platforms.
To begin with, the IRS requires the cryptocurrency exchanges to issue either form 1099-K or 1099-B.
If you have been receiving these forms from your cryptocurrency exchange, then there is no doubt that the IRS is aware of your Bitcoin transactions. But not every Bitcoin user receives these forms.
When your cryptocurrency exchange sends you either of the forms, it also sends the same to IRS.
That way, while filing your taxes, the IRS will detect whether you are lying about your Bitcoin transactions. If you hide these transactions, the IRS system automatically detects and flags you.
Issuing Subpoenas
IRS can also track your Bitcoin by issuing subpoenas to cryptocurrency exchanges forcing them to reveal your Bitcoin activities.
And this is very likely when the IRS suspects that you have been transacting large amounts of Bitcoin and have not reported it as the law requires.
In 2018, the IRS forced Coinbase to disclose about 13,000 user accounts. And this is one example of the IRS using subpoenas to track Bitcoin users.
Over the years, other cryptocurrency exchanges like Circle and Kraken have also disclosed user accounts and the identities of entities behind them.
With subpoenas, the IRS can find out how many taxpayers are using Bitcoin but have not reported their Bitcoin transactions on their tax returns.
With this realization, many cryptocurrency exchanges are more open to reporting the transactions. If they violate this obligation, they can face penalties.
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Take Away: Can The IRS Trace Your Bitcoin?
The IRS can track your Bitcoin easily.
While some Bitcoin users may assume that their Bitcoin transactions are under the radar of the IRS, they may be shocked when the IRS discovers them and their Bitcoin.
Essentially, increasing regulations on Bitcoin and other cryptocurrencies makes it easier for the IRS to monitor Bitcoin activities.
