By admin of MillarLaw A Professional Corporation On Sunday, January 21, 2018

The 21st Century could well become known as the “Age of Anonymity”. Why, because of crypto-currencies. Crytpo-currency uses blockchain technology which is a fancy way of saying without that without the password it is forever hidden in a complex computer code. Crypto-currencies are not supported by any governments and have no underlying asset backing them, they are to many a pure illusion of value. But there are multiple millions of users of such currencies anyway.

Among the uses are avoidance of currency controls, such as in China. China limits the export of its currency to the equivalent of $50,000 per individual per year. By using a crypto-currency the only limit is access to the crypto-currency itself. This unique ability to hide assets enables all sorts of nefarious activities to occur and will require an invigorated effort on the part of taxing and other authorities to detect.

The challenge for now is that there is no established regulatory regime, in the U.S. or globally that compels crypto-currency exchanges to report account holder activity. There is no Form 1099 equivalent. There is no question on Form 1040 or any other U.S. tax return that asks about the ownership or control of a crypto-currency account (such as you would find on Schedule B of Form 1040 for offshore accounts or trusts). Compliance is therefore up the individual who has already demonstrated a need to hide income or assets or engage in non-detectable transactions.

Surely if an individual were to have unreported income from the use of crypto-curency the IRS could refer the case to the Criminal Investigation Division and the Justice Department for possible prosecution. The use of a John Doe Summons to obtain the records of U.S. taxpayer from crypto-currency exchange Coinbase may lead to such prosecution for tax evasion. But that is a limited action in that Coinbase is located in the U.S., there are hundreds of exchanges offshore with no reporting mechanism and which are built with secrecy in mind. So has the world just found a new form of Swiss Bank?

The complexity of gathering information could be buffered by the inclusion through amendment of the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS). FATCA is the U.S. initiative that requires foreign financial institutions to report the identity and account balances of U.S. persons who maintain accounts with them. CRS is the European version of FATCA. The inclusion of crypto-currency account reporting by Exchanges as on a global scale would require an agreement on on complex issues, but the frameworks already exist. It would also recognize the imperative to reduce anonymous financial transactions.

The incentive to conceal assets through the use of crypto-currency or conceal financial transfers is all too compelling in this Age of Anonymity. The IRS has limited resources and in the absence of international action, the opportunity to evade taxes, avoid creditors, conceal criminal activities and facilitates terrorism will continue to go unchecked. For those crypto-currency holders and investors who want assistance in reporting their income and gains and losses we offer expertise in the disclosure and reporting, including the use of voluntary disclosures.