What would happen to the value of cryptocurrencies if Exchanges had to Issue a Form 1099 on an annual basis?

By admin of MillarLaw A Professional Corporation On Sunday, November 26, 2017

The IRS issued a John DOE Summons for records of U.S. account holders of Coinbase, Inc. (“Coinbase”)a cryptocurrency exchange based in San Francisco, California. Coinbase objected to production of the records and a Summons Enforcement case was brought in the United State District Court, Northern District of California.
A John DOE Summons is authorized under Internal Revenue Code §7609(a). The position of the Department of Justice (DOJ), representing the IRS is:

“John Doe summonses have long been used as a vital tool to assist the IRS in ensuring that all taxpayers, not just those who are already subject to third party reporting requirements, pay their fair share of taxes.”

The key fact in this and prior John DOE Summons cases is the absence of “third party reporting”. Third party reporting would presumably be done through the use of a form of Miscellaneous Income Report like a Form 1099-K “Payment Card and Third Party Network Transactions. A Form 1099-K requires credit card companies (as an example) to report to the IRS the annual and monthly dollar value of transactions processed for each merchant. The IRS can then match the reported amounts with the merchants income tax returns to help determine compliance.

If a similar “third party reporting” form were to be developed and required to be used by cryptocurrency exchanges the anonymity of cryptocurrency may be imperiled. The litigation in Coinbase is about preventing or forcing disclosure of U.S. account holders so that the IRS, and presumably state taxing agencies can determine if U.S. taxpayers are (or have) reported their proper income tax. It is the position of the IRS and the DOJ that a cryptocurrency exchange is no different conceptually from a Barter Exchange or from undisclosed foreign bank accounts, all of which were used to understate income and assets.

Whether a particular cryptocurrency holder is an “investor” , a “trader” or a “consumer”, the holder, if a U.S. taxpayer, must report annually his/her income from the sale of cryptocurrency. If the exchanges are required to report annual transaction activity to the IRS for all U.S. account holders, it may not be an huge leap of faith to assume the cryptocurrency exchanges will treat U.S. persons as unwelcome just like the Swiss and other banks have following the U.S. crackdown on offshore banking. What that kind of action would mean to the value of any given cryptocurrency is open to speculation.