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Recently, on September 14, 2016, the Treasury Inspector General for Tax Administration (TIGTA) released a scathing report showing the Internal Revenue Service [failed to collect nearly $9 billion in backup withholding tax in Fiscal Tax Year 2013]( https://www.treasury.gov/tigta/auditreports/2016reports/201640078fr.pdf). In a follow-up report released September 21, 2016, TIGTA audited the IRS strategy and enforcement actions focused on illegal activities and income tax avoidance through virtual currency transactions and provided some recommendations to the IRS to improve collections and enforcement in this area. As a result of TIGTA’s report, on November 18, 2016, Vice Motherboard says [The IRS Demands Identities of All US Coinbase Traders Over Three-Year Period]( https://motherboard.vice.com/read/irs-demands-identities-of-all-coinbase-traders-over-two-year-period).   

It should be understood, this will not be an isolated action by the IRS, but rather this could be the beginning of a focus by the IRS on all virtual convertible currency users, traders, exchanges and crypto-based economies moving forward. 

Let’s take a look at the issues and recommendations of TIGTA….

### But First, the Required Legalese…

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

### The TIGTA Audit, Recommendations, and Recent IRS Actions

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On September 21, 2016, the Treasury Inspector General for Tax Administration (TIGTA) released a report titled, [*As the Use of Virtual Currencies in Taxable Transactions Becomes More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance*](https://www.treasury.gov/tigta/auditreports/2016reports/201630083fr.pdf), which was,  “aimed at auditing the IRS strategy for addressing income produced through virtual currencies.” 

When Bitcoin created an asset class which had not existed before (virtual convertible currencies), big Bitcoin miners and traders petitioned the Internal Revenue Service (IRS) to provide guidelines on the tax treatment of Bitcoin, Litecoin, and other virtual currencies. On March 25, 2014, the Internal Revenue Service (IRS) responded with [Internal Revenue Notice IR-2014-36 IRS Virtual Currency Guidance]( https://www.irs.gov/pub/irs-drop/n-14-21.pdf), which classified Bitcoin and all other “virtual convertible currencies” (read STEEM, STEEM Based Dollars, Ethereum, LISK, etc.) as taxable personal property.

Earlier installments of the US Tax Considerations series have covered how to apply those tax rules for individuals who trade those currencies and earn STEEM and STEEM Based Dollars when blogging for magic internet money.

* [US Tax Considerations When Blogging for Magic Internet Money (Part I)]( https://steemit.com/tax/@lpfaust/us-tax-considerations-when-blogging-for-magic-internet-money-part-i)
* [US Tax Considerations When Blogging for Magic Internet Money (Part II)]( https://steemit.com/tax/@lpfaust/us-tax-considerations-when-blogging-for-magic-internet-money-part-ii)
* [US Tax Considerations- Cryptocurrencies Held in Foreign Exchanges]( https://steemit.com/tax/@lpfaust/us-tax-considerations-cryptocurrencies-held-in-foreign-exchanges)
* [US Tax Considerations- Blogging on Steemit: Business or Hobby? How the IRS Determines It]( https://steemit.com/tax/@lpfaust/us-tax-considerations-blogging-on-steemit-business-or-hobby-how-the-irs-determines-it)
* [US Tax Considerations- Blogging on Steemit: Not-for-Profit Activities Hobbies)]( https://steemit.com/tax/@lpfaust/us-tax-considerations-blogging-on-steemit-not-for-profit-activities-hobbies)
* [US Tax Considerations- Blogging on Steemit: For Profit Business Activities]( https://steemit.com/tax/@lpfaust/us-tax-considerations-blogging-on-steemit-for-profit-business-activities)

A future installment is geared towards cryptocurrency miners and should be released in the coming weeks. 

The September 21, 2016, audit by TIGTA was an examination of the IRS as it related to collections and enforcement actions in the arena of tax avoidance, and the funding and laundering of money related to illegal activities using virtual convertible currencies. The audit report highlighted three recommendations, which the IRS agreed with, related to collections and enforcement vis-a-vis convertible virtual currencies:

* develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals and an action plan with a timeline for implementation. 
* provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies.
* revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.

It would appear the Internal Revenue Service was not content to let the grass grow under their feet. Both Zerohedge and VICE Motherboard report on November 18, 2016,  Coinbase received an IRS demand for records related to all US Coinbase Traders over the open tax periods (the past three years). As of the writing of this article, the IRS has acknowledged but not responded to, a request for comment.

### The World of Crypto is on the IRS Radar and is a Focus

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The IRS action to demand records from Coinbase for **all** US Coinbase traders over a three year period illuminates the focus of resources the IRS is willing to commit to this expedition. When one considers all blockchain platforms contain immutable ledgers recording every exchange of virtual currencies, it would be an understatement to say it is an auditor’s dream. I would imagine other US based crypto exchanges (such as Poloniex and Kraken) will receive their demand letters soon, and foreign exchanges with countries the US has tax treaties with (such as Bitstamp) will receive their notices next and so on. I would imagine Steemit, Inc., might see something similar within the next year or so.

In my previous article, [US Tax Considerations – IRS Missed Billions in Backup Withholding and Why Steemit Authors and Curators Should Be Concerned]( https://steemit.com/tax/@lpfaust/us-tax-considerations-irs-missed-billions-in-backup-withholding-and-why-steemit-authors-and-curators-should-be-concerned), I discussed how regulatory issues related to backup withholding tax could open the door to something much deeper and more serious for companies who failed to report and remit those taxes. 

It would seem the next logical step would be to examine this area.

### Wrapping it up

The focus of everyone in the cryptoverse should be to get into compliance ASAP. Remember, ignorance of the regulations is not considered a defense, so either educate yourself or find a tax expert knowledgeable in this arena to help you get into compliance. It is now clear the IRS determined the status quo will no longer remain.

*Have a tax question? Please feel free leave a question in the comment section below, and I may feature it in a future blog post.*

*Please follow me on my blog @lpfaust if you enjoy my content.*