The Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Treasury, defines virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.” In other words, virtual currency does not have legal tender status in any jurisdiction. While this form of currency has been around for over 20 years, the term “virtual currency” appears to have been coined around 2009, paralleling the development of digital currencies and social gaming. Use of virtual currency in the United States continues to grow exponentially and the IRS has taken notice.
Transactions in virtual currency are taxable just like those in any other property, according to IRS Commissioner John Koskinen. However, because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS.
In a clear message to U.S. taxpayers, a federal court in the Northern District of California recently entered an order authorizing the IRS to serve a John Doe summons on Coinbase Inc., a virtual currency exchanger headquartered in San Francisco, California, seeking information about U.S. taxpayers who conducted transactions in convertible virtual currency during the years 2013 to 2015. The purpose of which is to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown. The summons directs Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions.
Dale F. Jensen, CPA